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0 


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i 

lOx 

14x 

18x 

22x 

26x 

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! 

>/ 

12x 

16x 

20x 

24x 

28x 

32x 

Tha  copy  filmad  hart  has  baan  raproducad  thanks 
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Las  axamplairaa  originaux  dont  la  couvartura  •rt 
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par  la  pramiar  plat  at  an  tarminant  soit  par  la 
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d'impraasion  ou  d'illustration.  soit  par  la  second 
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d'impraasion  ou  d'illustration  at  an  tarminant  par 
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whichavar  applias. 


Un  das  symbolas  suivants  apparaitra  sur  la 
darniira  imaga  da  chaqua  microficha.  salon  If 
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et  de  haut  an  bas,  an  prenant  la  nombra 
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illustrent  la  mithode. 


1 

2 

3 

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4  5  6 


MICROCOPY    RESOLUTION   TEST  CHART 

(ANSI  and  ISO  TEST  CHART  No    2) 


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ry* 


WHY  IS  THE  DOLLAR  SHRINKING? 


mam 


;V><f^° 


THE  MACMILLAN  COMPANY 

NIW  VOPK   •    BOSTON  •   CHICAGO  •   DALLAS 
ATLANTA  •    SAN   FRANCISCO 

MACMILLAN  &  CO..  Limited 

LONtX)N  •    BOMBA>    •   CALCUTTA 
MELBOURNE 

THE  MACMILLAN  CO.  OF  CANADA,  Ltd. 

TORONTO 


■r-C»iV^ 


^^^ 


WHY  IS  THE   DOLLAfe";  ' 
SHRINKING? 

Lffw 

A  STUDY  I\  THE   HIGH  COST 
OF  LIVING 


BY 


IRVING   FISHER 

PROFESSOR   OF    rOLITK  AI.    KCONOMY    IN    YALK    INIVERSITY 

AUTHOR   OF    "THK    I"rK<  llASIN(i    POWER   OF    MONEY" 

"THE  NATURE  OF  <AP1TAL  AND  INCOME,"  ETC. 


!»•      ' 


NttD  gorfe 

THE   MACMILLAN   COMPANY 

1914 

All  righu  reserved 


.^■/ 


COPTBIOHT,   1914, 

bt  the  macmillan  company. 


Set  up  and  electrotyped.     Published  September,  1914. 


•'.  f .  Cnshins;  Co.  —  Berwick  &  8mlth  Co. 
Norwood,  Mass.,  U.S.A. 


r^L 


SIR   DAVID   BARBOUR 

VETERAN    ADVOCATE    OP    THE    PRINCIPLES 
FOR   WHICH    THIS    BOOK    STANDS 


MJii'y^^ 


PREFACE 


Present-day  dLscussion  on  the  high  cost  of 
living  shows  some  bewilderment  in  the  mind  of  the 
general  public  as  to  the  mechanism  by  which  the 
scale  of  money  prices  is  determined.  Few  j^eople 
realize  that  the  principles  determining  the  general 
scale  of  prices  are  quite  distinct  from  the  principles 
deterrainincT  the  individual  prices  themselves.  Few 
realize,  for  instance,  that  the  money  price  of  anv 
commodity  has  to  do  not  only  with  that  commod- 
ity but  also  with  money,  and  that,  therefore,  a 
monetary  element  enters  into  every  price. 

The  object  of  this  book  is  to  state,  as  simply  as 
possible,  the  general  principles  which  fix  the  scale 
of  prices,  and  to  show  the  manner  in  which  these 
principles  apply  to  the  present  -  high  cost  of 
living." 

These  principles  are  not  new.  They  are  the 
same  as  the  well-known  principles  of  Ricardo.  and 
of  most  subsequent  writf.-r3  on  econom'.os.  They 
have  been  mi:>re  elabijrately  statt^il  in  my  "  The 
Purcha.>ino'  Power  of  Morif^v." 

If  these  princi:.Ies  are  corrt- 
power   of    a    dollar  —  ivt   its    r 
of   pricc-s  —  dtpemls    fxc-lusiv*: 

VII 


•;l.  the  purchasing 
ciprncal.  the  level 
V   on  hv>,-  detinite 


PREFACE 

factors:  (1)  the  volume  of  money  in  circulation  ; 
(2)  its  velocity  of  circulation  ;  (3)  the  volume  of 
bank  deposits  subject  to  check  ;  (4)  its  velocity  ; 
and  (5)  the  volume  of  trade.  Of  course,  each 
one  of  these  five  influences  itself  depends  on 
other  more  remote  influences,  and  these  others  on 
others  still  more  remote,  and  so  on  ad  infinitum. 
But  no  cause  can  affect  the  scale  of  prices  except 
as  it  acts  through  one  of  the  five  above  enumerated. 
In  my  opinion  the  branch  of  economics  which 
treats  of  these  five  regulators  of  purchasing  power 
deserves  to  be  recognized  as  an  exact  science,  ca- 
pable of  precise  formulation,  demonstration,  and 
statistical  verification. 

For  a  hundred  years  the  world  has  been  suffer- 
ing from  periodic  changes  in  the  scale  of  prices, 
affecting  the  interests  of  liundreds  of  millions  of 
human  beings  and  producing  alternate  expansions 
and  depressions  of  tr?de.  It  is  not  too  much  to 
say  that  the  evils  of  a  variable  monetary  standard 
are  among  the  most  serious  economic  evils  with 
whicli  civilization  has  to  deal. 

In  the  United  States  we  are  about  to  witness 
some  extremely  interesting  applications  of  the 
principles  here  stated,  owing  to  the  two  great  acts 
passed  by  Congress  toward  the  close  of  1913,  i.e., 
the  tariff  act  and  the  currency  act.  For  instance, 
the  tariff  reduction,  by  inviting  imports  of  com- 
modities, will  tend  for  a  time  to  encourage  the  ex- 
port of  gold,  until  the  drain  limits  itself  by  the 
fall  of  our  prices  or  the  rise  of  foreign  prices.     The 

viii 


PREFACE 

currency  act  will  probably  tend  to  increase  bank 
deposits  and,  if  so,  to  restrain  the  fall  of  the 
American  scale  of  prices  and  so  to  prolong  the  ex- 
port of  gold.  If  these  results  ensue,  there  may 
well  be  much  surprise  expressed  and  some  criticism. 
It  will  then  be  important  that  the  public  shall 
correctly  understand  what  is  going  on ;  otherwise 
many  senseless  proposals  may  be  made  and  even 
adopted. 

I  hope  soon,  in  another  book,  to  set  forth  a 
remedy  for  changes  in  the  scale  of  prices  by 
"standardizing  the  dollar." 

I  am  indebted  to  the  North  Ameri  an  Review  for 
permission  to  use  unaltered  certain  passages  from 
my  article  "Is  the  High  Cost  of  Living  Going 
Higher  ?  "  published  in  December,  1912. 

I  am  also  under  obligations  to  several  of  my 
students,  especially  Mr.  Paul  M.  Atkins,  for  aid 
in  assembling  the  statistics  from  which  the  dia- 
grams are  constructed. 

IRVING  FISHER. 

Yai.f,  T'niversity, 

April,  1914. 


IX 


POSTSCRIPT 

(AcursT  _>.'),  1914) 

This  bfK)k  was  already  printed,  hut  not  issued,  when 
the  great  European  war  broke  out.  So  colossal  an 
event  will,  naturally,  have  important  effects  on  j)rices. 
At  this  writing,  when  the  war  is  merely  i)eginning,  it 
is,  of  course,  quite  impossible  to  predict  with  accuracy 
what  all  these  effects  will  be.  In  general,  however, 
we  may  feel  confident  that  the  net  and  ultimate  effect 
will  be  to  aggravate  the  upward  tendency  which,  as  we 
already  had  reason  to  believe,  was  impending.  In 
Europe,  especially,  the  cost  of  living  will  probably  ri>e 
above  anything  previously  known.  The  rise  is  likely 
to  be  greater  after  the  war  than  during  the  war. 
The  rise  during  the  war  will  probably  be  less  rapid  in 
England  than  in  the  other  warring  countries,  but  after 
the  war,  more  rapid.  There  is  even  possible,  the 
anomaly,  that,  during  the  war,  the  general  level  of 
prices  in  England  will  actually  fall.  The  rse  during 
the  war,  in  small  countries,  like  Helgium,  will  probalily 
be  greater  than  that  in  large  countries,  like  France, 
which  are  more  nearly  self-supporting.  The  rise  iti  any 
coimtry  which  resorts  to  irredeemable  paper  money 
will  be  further  aggravated  in  proportion  to  the  degree 
of  inflation. 

1 


POSTSCRIPT 


Such  are  the  chief  probable  effects  on  price  levels. 

But  what  is  more  important,  this  rise  will  i)e  an  es- 
pecial hardship  to  the  peoples  at  war  because  of  the 
great  impoverishment  which  the  war  will  surely  bring. 
That  is  to  say,  high  money  prices  will  be  accompanied 
by  low  money  earnings.  The  cost  of  the  war,  accord- 
inu'  to  the  best  estimates,  will  equal  or  exceed  half  of 
the  total  income  of  the  inhabitants  of  the  warring 
nations.  It  is  true  that  much  of  this  burden  can  be 
shifted  to  future  ye:irs ;  but,  even  then,  it  will  severely 
ta.\  resources  already  crippled  by  the  previous  destruc- 
tion and  disorganization  of  capital. 

Fortunately  for  us  in  the  United  States,  unless  we 
are  drawn  into  the  conflict,  the  rise  of  prices  will  be  less 
than  in  Europe,  and  we  shall  have  our  earning  power 
substantially  unimpaired. 

We  are  speaking,  of  course,  only  of  general  price 
movements,  not  of  individual  prices.  We  may  be  sure 
that,  though  many  goods  will  rise  in  price,  some  will 
fall,  and  some  will  oscillate  up  and  down.  In  fact,  the 
first  and  most  striking  effect  of  the  war  on  prices  will 
be  to  disperse  or  scatter  them.  Foods  will  especially 
rise  an(i  bonds  will  especially  fall. 

In  the  four  pages  to  which  this  postscript  must  be 
restricted,  it  is  oidy  possible  to  mention  a  few  of  the 
chief  reasons  which  have  led  to  these  conclusions. 

This  book  was  written  largely  to  show  that  the  price 
level  is,  in  general,  the  resultant  of  a  race  between 
the  circulation  of  money  and  credit  on  the  one  hand 
and  the  volume  of  trade  on  the  other,  —  a  race  as  to 
which  will  grow  the  faster. 

During  the  war  both  racers  will  rest  awhile.     Prob- 

2 


I'OSTSCRIPT 


i 


ably  both  will  recede  tnaleriiilly,  hut  trade  faster  than 
cireulution ;  this  will  cause  prices  to  rise.  After  the 
war  both  will  ajjain  expand,  but  credit  will  rebound 
faster  than  trade;  this  will  cause  prices  to  rise  still 
further. 

If  we  examine  the  diagrams  of  this  book  during  and 
after  the  great  wars  of  modern  times,  the  ('ritnean  War 
(lS54-18ab).  the  American  Civil  War  (ISCJl-lSf).")), 
the  Franco-Prussian  War  (1870-1871),  the  Spanish- 
American  War  (1898),  the  Boer  War  (1899-1902), 
and  the  Russo-,Japanese  War  (1904-1905),  we  shall 
notice  that  the  price  level  usually  rises  at  the  begin- 
ning of  a  war  and  again  after  the  war  is  finished.  In 
the  American  Civil  War,  the  existence  of  the  Green- 
backs obscured  these  facts.  But  the  price  level,  ex- 
pressed in  gold,  increased  faster  after,  than  it  did  dur- 
ing, the  Civil  War. 

Edward  E.  Gellender,  who  has  made  a  detailed 
study  of  prices  in  relation  to  wars,  shows  in  the  publi- 
cations of  the  (British)  Institute  of  Bankers,  Novem- 
ber, 1901,  that  after  wars  trade  generally  booms  and 
prices  rise  until  a  crisis  appears  (e.g.  that  of  1857  after 
the  Crimean  War,  that  of  ISOO  after  the  Civil  War, 
that  of  1873  after  the  Franco-Prussian  War). 

We  have  ventured  the  opinion  that  the  English 
price  level  will  rise  less  during  and  more  after  the  war 
than  Continental  price  levels.  This  is  because  it  is 
believed  that  the  effect  on  prices  due  to  changes  of 
trade  in  England  will  be  less,  and  tlie  effect  on  prices 
due  to  changes  of  her  money  and  credit  circulation, 
more  than  on  the  Continent,  both  during  and  after 
the  war.     During   the   war,   England   will   withdraw 

3 


^Ms^jik' 


,     '** 


dnSE 


j^kziH 


POSTSCRIPT 

fewer    reservists     from     inaustry     than     the     other 
nations;    and  there  is  less  chance  in  Knuhiiul  of  the 
stoppage,  by  physical  destniction.  of  her  internal  com- 
merce.     Even  her  foreign  trade  is  being  safeguarded 
from  interference  far  more  thoroughly  than  is  that  of 
any  other  warring  nations  ;  and,  in  any  event,  thus  for- 
eign trade,  vast  as  it  is,  only  amounts   to  perhaps  a 
tithe  of  the  internal  commerce.     On  the  «»ther  hand, 
since  England  is  much  more  fully  on  a  credit  basis  than 
the  Continent,  where  the  use  of  checks  is  not  yet  wide- 
spread, the  refluction,  through  hoarding  and  stoppages 
of  loans,  in  the  circulation  of  cash  an<l  credit  in  Eng- 
land, will  have  more  effect  toward  depressing  the  price 
level  than  on  the  Continent.     After  the  war  the  rebound 
of  credit  will  likewise  be  more  effective  in  England  than 
on  the  Continent. 


ii. 


TABLE  OF  CONTENTS 


HKOTIOW 

1.  Wealth    . 

2.  Property 


CHAPTER   I 
UNDERLYING   IDEAS 


PAOI 
I 


CHAPTER  II 

MONEY 

1.  Money  Fallacies 

2.  Prices  in  (tkneral  and  ix  Particular    .        .         i 
;}.  The  Nature  of  Money 25 

CHAPTER   III 
THE   EQUATION   OF   EXCHANGE 

1.  Arithmetical  Illustration        ....  34 

2.  Mkchanical  Illustration 41 

3.  Algebraic  Illustration 44 

4.  The  "  Quantity  Theory  of  Money  "         .        .  46 

CHAPTER  IV 
BANK   DEPOSITS   SUBJECT   TO   CHECK 


1.  The  Mystery  of  Circulating  Credit 

2.  The  Basis  of  CiKcur.ATixG  CuKmr     , 

xi 


52 
59 


TABLE  OF  CONTENTS 


•frTlos 

•\.    Kankino  Limitationh 


U3 


4.  TiiK  Total  Cihhkm  v  ani»  its  Cikcii-ation  80 

5.  1)E1>0HIT     t'UKKKNCY      N«JKMALIY      FkoFORTIONAI. 

Tl>    MoNKY 71 

G.  Summary 74 

CHAPTER   V 

TRANSITION    PERIODS  — CRISES   AND 
DEPRESSIONS 

1.  RisiNcs  P:.(CKH 70 

2.  How  A  Risk  ok  Pricks  Cri.MiNATEH  in  a  Crisis      78 

3.  COMI'LKTION    OK    TIIK    C'KEDIT    CyCLB         ...         80 

4.  ThK    SAFECif  AKU    ok    IIlUH    INTEREST      .  .  .         ti'6 


f, 


CHAPTER   VI 
REMOTE    INFLUENCES  ON   PRICES 

1.  iNKLrKXCE  WHICH  CONDITIONS  OK  PrODICTION 
AND  CONSIIMI'TION  ExERT  ON  TrAUE  AND 
THEKKKORE   ox    Pkkes 

J.    Infuknck  ok  Individi'a'.  Habits  on  Velocity 

OK    ClKCILATlttN    AND    THEREFORE   ON    PrICES 

3.  Inklcknces  on  the  Volume  ok  Deposit  Cur- 
rency   AND    therefore   ON    PrICES 


88 

93 

lUl 


CHAPTER  VII 

REMOTE  INFLUENCES  ON  t>RICES  (rontinued) 

1.    Influence  ok  the   -Balance   ok   Trade"   on 
the   Quantity  ok  Money  and  therekore 


ON  Pkice- 


104 


xu 


Ik 


1 

-3 

-  a 

i 


TABLE  OP  rON'TKNTy 

mmnw 

2.   Infmkvck  or   MKF.xtvo   and   Mintino  on  thk 

'it'ANTITV     OK      MoNF.Y     A.Vn     TIIKKKKORR     ON 

Prkkm 

X  iNFI.rKNCK  OF  pROIlt'CTION  AND  rON8I'MPTION 
OK  MoNFY  MkTAF.S  on  <ilANTITY  OK  MoNKY 
AND   THEREKORE    ON    PricKO       .... 


r4M 


111 


114 


CHAPTER   VIII 

OPERATION   OF   MONETARY   SYSTEMS 

1.  Grehham's  Law 

2.  Bimetallism 

n.   The  "Limping  S.^npard" 


121 
124 
130 


CHAPTER    IX 
CONCLUDING   DISCUSSION  OF   PRINCIPLES 

1.  Can  "Other  Things  Remain  Eqial"?     .        .     136 

2.  An   Increase   of   Money   does   not   Decrease 

ITS  Velocity 141 

3.  An  Index  Number  of  Prices      ....     148 


CHAPTER   X 

HISTORY   OF   PRICE   LEVELS 

1.  Early  Records 

2.  The  Nineteenth  Century   . 

3.  The  Present  Price  Movement  . 
Arr-iNDix  TO  Chapter  X    . 


l.=)6 

\m 

180 
186 


Xlll 


TABLE  OF  CONTENTS 


CHAPTER   XI 

CONFUSIONS   CONCERNINC;   PRESENT 
PRICE   MOVEMENT 

1.  F/LLACIKS    rNDF-ULYINO   POPULAR  EXPLANATIONS 

OF  THE  IlKiii  Cost  of   Living 

2.  Popular  Explanations  of  the  High  Cost  of 

Living 

a.  Effect  of  Fallacious  Beliefs  .        .        .        • 


189 

191 
204 


M 


CHAPTER  XII 
THE   FUTURE 

1.  As  TO  Money 

2.  As  TO  Creiht  and  Volume  of  Trade 

3.  Conclusions 


207 
215 
219 


?    1 

I 


i  .  !■ 


XIV 


i  .? 


WHY  IS  THE  DOLLAR  SHRINKING? 


mmrnt-^'  w^ 


WHY  IS  THE  DOLLAR 
SHRINKING  ? 


A  STUDY  IN  THE   HIGH  COST  OF  LIVING 

CHAPTER  I 

UNDERLYING   IDEAS 

§  1.   Wealth 

The  purpose  of  this  little  book  is  to  explain  as 
clearly  antl  briefly  as  possible  the  reasons  why  a 
dollar  will  not  go  as  far  as  it  did  ten  or  fifteen  years 
ago  and  why  in  general  its  purchasing  power  should 
fluctuate  from  time  to  time.  This  problem  is  only 
a  part  of  the  great  problem  uf  the  high  cost  of  living. 
The  problem  of  the  cost  of  living  in  its  completeness 
is  a  problem  of  the  purchasing  power  of  incomes, 
and  the  purchasing  power  of  any  income  is  de- 
pendent on  two  factors  of  which  the  purchasing 
power  of  the  dollar  is  only  one ;  the  other  is  the 
number  of  dollars  in  that  income.  In  the  present 
book  we  shall  not  take  up  the  latter  factor  except 
incidentally,  but  shall  confine  ourselves  to  the 
former,  —  the  purchasing  power  of  the  dollar. 

B  1 


I] 

t    I 
II 

i:  i 


f  I 


WHY   IS  THE  DOLLAR  SHRINKING?      [Ch.  I. 

But  this  narrower  problem  is  really  the  important 
problem  at  the  present  time,  for  we  are  not  suffer- 
ing to-day  — at  least  the  average   man  is  not  — 
from  a  high  cost  of  living  in  the  sense  that  our  in- 
come as  a  whole  will  not  buy  as  much  as  fifteen  years 
ago.     Though  it  is  quite  true  that  an  individual 
dollar  will  not  buy  as  much  to-day  as  fifteen  years 
ago,  yet  the  average  man  to-day  has  so  many  more 
dollars  of  income  than  did  the  average  man  fifteen 
years  ago  that  incomes  as  a  whole  will  buy  more. 
If  we  are  to  understand  this  problem  of  the  high 
cost  of  living,  we  must,  at  the  outset,  recognize  th« 
fact  that  the  cost  of  living  is  "high"   in  terms  of 
money.     The   problem  then  is  not  only  concerned 
with  "  living  "  —  i.e.,  food,  clothing,  shelter,  etc.  — 
for  which  we  pay  our  money,  but  also  with  this 
money  which  we  pay.     In  short  the  problem  of  the 
purchasing  power  of  the  dollar  has  to  do  with  the 
dollar  as  well  as  with  the  things  the  dollar  will  buy. 
It  is  simply  a  question  of  the  relation  between  money 
and  goods. 

There  are  few  things  in  life  more  familiar  than 
"money"  and  few  less  understood.  To  avoid 
errors  at  the  outset,  we  should  acquaint  ourselves 
with  certain  underlying  ideas. 

One  very  common  mistake  is  to  confuse  money 
wnth  wealth.     Wealth  ^  includes  all  material  ohjectf 

»  For  fuller  discussion,  see  the  writer's  The  Nature  of 
Capital  and  Income,  New  York  (Macmillan) ,  1900.  Re- 
printed 1912. 


Hi 


f  . 


§  1.1 


UNDERLYING  IDEAS 


oioncd  by  human  beinqs.  Thus  lands  and  buildings, 
raw  materials  and  finished  products  are  wealth. 
Gold  is  a  kind  of  wealth,  which,  thouj^h  insignificant 
in  amount,  is  important  because  from  it  the  chief 
money  of  the  world  is  made,  and  in  terms  of  it 
all  other  wealth  is  expressed. 

Because  we  usually  express  wealth  in  dollars 
and  cents  we  are  therefore  apt  to  forget  that  pri- 
marily each  kind  of  wealth  is  measured,  not  in 
money,  but  in  its  own  physical  units.  There  are 
several  ways  of  measuring  wealth  in  physical  units. 
Most  articles  of  commerce  are  measured  by  weight. 
Coal  is  measured  in  tons ;  cotton  in  pounds ;  gold 
in  ounces.  Even  when  gold  is  measured  in  "dol- 
lars" we  must  not  forget  that  the  gold  dollar  is 
merely  a  certain  unit  of  weight  —  about  the  nine- 
teenth of  an  ounce  {i.e.,  25.8  grains  of  standard  gold, 
nine-tenths  fine  or  pure). 

Some  commodities  are  measured  in  spacial  units 
—  units  of  length,  area,  or  volume.  Thread  is 
measured  by  the  yard ;  carpets  by  the  square 
yard ;  land  by  the  acre ;  gas  by  the  cubic  foot ; 
wheat  by  the  bushel ;  milk  by  the  quart ;  wood 
by  the  cord. 

Sometimes  there  are  definite  units  in  which  articles 
are  already  formed.  Thus  eggs,  while  they  may  be 
measured  in  pounds,  are  usually  simply  counted,  the 
egg  itself  being  the  unit.  Chairs,  books,  desks,  bi- 
cycles, locomotives,  and  hundreds  of  other  articles 
might  be  cited  which  exist  in  definite  units. 

3 


i     ! 


t-  t 


WHY  IS  THE  DOLLAR  SHRINKING?      (Ch.  I. 

Wc  can  usually  translate  from  one  unit  into 
another.  Thus  tomatoes  may  be  measured  and 
sold  by  the  bushel,  which  is  a  spacial  unit,  or  by  the 
pound,  which  is  a  weight  unit,  or  they  may  be 
counted  and  sold  by  the  dozen. 

Wealth  must  not  be  confused  with  the  mere 
qualifies  of  wealth  ;  thus  the  fert='ity  of  tiie  soil  is 
not  wealth  though  fertile  soil  is  wealth.  Nor  should 
woaltii  be  confused  with  the  use  or  benefits  of 
wealth,  nor  with  the  rights  to  those  benefits  ("prop- 
erty rights") ,  nor  with  the  evidence  or  written 
certificates   of   those   rights. 

Different  kinds  of  wealth  are  constantly  being 
exchanged.  An  exchange  of  two  articles  of  wealth 
between  two  different  persons  is  the  mutual  and 
voluntary  transfer  of  their  ownership,  each  transfer 
being  made  in  consideration  of  the  other. 

While  it  is  true  that  any  two  kinds  of  wealth 
may  be  exchanged,  some  kinds  of  wealth  are  more 
acceptable  in  exchange  than  others.  ]Money  pri- 
marily means  v.ealth  which  is  generally  acceptable  in 
exchange.  This  definition  is  based  on  the  most 
important  characteristic  of  money  —  its  exchange- 
ability or  capacity  to  serve  as  a  medium  of  exchange. 
When  one  of  the  two  objects  exchanged  is  money, 
the  exchange  is  called  a  purchase  (to  the  one  who 
parts  with  the  money)  or  sale  (to  the  one  who 
receives  the  money).  When  neither  of  the  two 
objects  exchanged  is  money  the  exchange  is  called 
barter. 


'  t 


§  1  ] 


UNDERLYING  IDEAS 


The  price  of  wealth  of  any  kind  is  the  amount 
of  wealth  of  any  other  kind  given  in  exchange  for  a 
unit  of  that  wealth,  i.e.,  it  is  the  "ratio  of  exchange" 
found  by  dividing  one  of  the  quiaitities  of  wealth 
exchanged  by  the  other.  The  denominator  of  this 
ratio  is  the  quantity  of  the  art'de  the  price  of  which 
is  to  be  expressed.  The  numerator  is  the  quantity 
of  the  other  article. 

Theoretically,  we  can  always  express  the  price  of 
either  of  the  two  articles  in  terms  of  the  other.  But 
usually  money  is  one  of  the  two  things  exchanged 
and  is  the  numerator. 

Having  defined  price,  we  next  define  value.  The 
value  of  any  given  amount  of  wealth  is  simply  its 
price  multiplied  by  its  quantity.  Thus  if  the  price 
of  steel  rails  is  S28  per  ton,  the  value  of  a  thousand 
tons  is  S28  per  ton  multiplied  by  1()(X)  tons,  or 
§28,000.  As  soon  as  we  set  a  price  on  various  kinds 
of  wealth  we  can  measure  their  value  if  we  know  their 
quantity. 

The  measurement  of  various  items  of  wealth  in 
"value"  has  a  great  advantage  over  its  measure- 
ment in  "quantity."  It  enables  us  to  translate 
many  different  kinds  of  wealth  into  one  kind  and 
thus  to  add  them  all  together.  Pairs  of  shoes, 
pounds  of  beef,  houses,  and  bushels  of  wheat  are 
unhke  quantities  and  cannot  be  added  together. 
But  their  values,  being  expressed  in  a  single  comni'^n 
unit  (as  the  dollar),  may  be  added  together,  despite 
the  diversity-  of  the  various  articles  thus  valued. 

5 


V 


11 

if 
?  i 


I 
?  i 


WHY    IS  THE  DOLLAR  SHRINKING?      K'n.  I. 

Since  prices  and  values  arc  usually  expressed  in 
terms  of  money,  —  the  most  cxchanKcahle  kind  of 
wealth,  —  money  may  he  said  to  hring  uniformity 
of  measurement  out  of  diversity.  In  other  words, 
it  is  not  only  a  medium  of  exchange,  but  it  can  be 
used  also  as  a  mea.vire  of  value. 

It  serves  as  a  means  of  comparing  values  of  differ- 
ent things  by  expressing  them  both  in  a  common 
denominator.  It  would  be  far  more  trouble  to 
compare  each  article  directly  with  every  other 
article,  for  there  would  be  very  many  more  com- 
parisons. 

Although  this  reduction  to  a  common  money 
measure  is  a  great  practical  c mvenience,  we  must 
not  imagine  that  it  gives  what  could  in  any  fair 
sense  be  called  "the  only  true  measure"  of  wraith. 
In  fact,  to  measure  the  amount  of  w«'alth  i)y  its 
money  value  is  often  misleading.  The  money  value 
of  car  wheels  exported  from  the  United  States  in 
one  month  was  ■S12,(MM)  and  in  a  later  month  .Sl'>,- 
0()(),  from  which  fact  we  might  infer  that  the  ciuantity 
of  these  exports  had  increased.  But  the  number 
of  car  wheels  exported  in  the  first  of  those  two 
months  was  2200,  and  in  the  second  only  2100, 
showing  a  decrease.  The  price  had  increased  faster 
than  the  number  had  decreased.  Likewise,  the 
figures  for  imports  of  coffee  in  these  periods  show 
a  decline  in  dollai.N  desinte  an  increase  in  pounds. 
Here  the  price  had  fallen  faster  than  the  number 
of  pounds  had   risen.     It  is  conceivable  that  the 

6 


f  . 


1 1.) 


UNDERLYING    IDEAS 


quantity  of  every  article  mij;ht  decrease,  and  yet 
tht    price   simultiineously    increase   so    mucii    that 
there  would  be  an  apparetit  increase  of  wealth  when 
there  really  was  nothing  of  the  kind.     This  is  apt 
to  l>e  the  case  in  times  of  inflation  and  depreciation 
of  the   currency,   such   as   the   present.     For   this 
reason  a  very  larjje  part  of  the  alle},'etl  recent  increase 
of  wealth  and  trade  in  the  I'nited  States  is  fictitious. 
E\-en  when  we  are  confessedly  trying  to  measure 
the  value  of  wealth  and  not  its  quantity,  it  is  diffi- 
cult or  inii)ossihlc  to  find  a  one  "right'"  way.     Im- 
ports into  the  United  States  from  Mexico  in  one 
year  were  worth  2S  millions  of  American  gold  dol- 
lars, and  ten  years  later  their  value  was  40  millions 
—  an  increase  in  value  of  42  per  cent ;   but  these 
very    same   imports    measured    in    Mexican    silver 
dollars  were  41   millions  in  the  first  year  and  90 
millions  in  the  second  —  an   increase  in  value  of 
nearly  120  per  cent.     I'liese  two  rates  of  increase, 
42  per  cent  and  120  per  cent,  although  they  repre- 
sent exactly  the  same  facts,  do  not  agree  with  each 
other;     yet   the    American    merchant    reckons   the 
values   one  way,  and    the   Mexican  merchant  the 
other.     In  a  sens(>  both  are  right;    that  is  to  .say, 
both  are  true  statements  of  the  comparative  value  of 
the  articles  imi)<)rted,  one  of  the  value  in  gold  and  the 
other  of  the  value  in  silver.     If  the  value  were  to  be 
measured  in  iron,  copper,  coal,  cotton,  or  any  other  ar- 
ticle, we  should  have  as  manyotherdillerent"  values," 
and  no  two  of  them  would  necessarily  ajiree. 

7 


t 


r. 


WHY  IS  THE  DOLLAR  SHRINKING?      [Cn.  I. 

"The  value  of  wealth,"  therefore,  is  an  Incomplete 
phrase  ;  to  be  definite,  we  should  say,  "  the  value  of 
wealth  in  terms  of  gold,"  or  in  terms  of  some  other 
particular  kind  t)f  wealth .  I  lenee  we  cannot  employ 
such  values  for  comparing  different  groups  of  wealth, 
except  under  certain  conditions,  and  to  a  limited 
degree.  To  compare  the  wealth  values  of  distant 
places  or  times  — as  America  and  China,  Ancient 
Rome  and  Modern  Italy  —  will  inevitably  give 
conflicting  and  unsatisfactory  results. 

§  2.   Property 

To  own  wealth  is  to  have  a  right  to  Its  benefiUi. 
Thus  to  own  a  loaf  of  bread  means  nothing  more 
nor  less  than  to  have  the  right  to  l)enefit  by  it,  i.e., 
to  eat  it,  sell  it,  or  otherwise  employ  it  to  satisfy  one's 
desires.  To  own  a  suit  of  clothes  is  to  have  the 
right  to  wear  it.  To  own  a  carriage  is  to  have  the 
right  to  drive  in  it  or  otherwise  utilize  it  as  long  as 
it  lasts.  To  own  a  plot  of  land  means  to  have  the 
right  to  use  it  forever.  The  ultimate  objects  for 
which  wealth  exists  are  the  benefit,'i  which  it  confers. 
If  some  one  should  give  you  a  house  on  condition 
that  you  should  never  use  it,  sell  it,  rent  it,  or  give 
it  away,  you  might  be  justified  in  refusing  it  as 

worthless. 

Many  articles  confer  benefits  on  their  owners 
by  yielding  them  monej-.  The  benefit  to  the  land- 
lord from  the  land  or  building  which  he  lets  is  the 
receipt  by  him  of  rent.     The  benefit,  to  the  owners 

8 


i  t 
I  ; 


u 


5  2.) 


UNDKFILYINO   IDKAS 


of  a  railway  from  tlic  railway  is  the  receipt  Hy  them 
of  their  divideiuis.  But  not  all  benefits,  of  course, 
are  simpl.N  the  receipt  of  money,  and  even  the  receipt 
of  money  is  not  an  ultimate  benefit,  but  only  a 
means  to  enjoyments. 

Benefits  may  also  be  rendered  by  human  beings. 
Such  benefits  are  usually  called  services  or  work 
done.  When  rendered  by  thinj^s  rather  than 
persons,  benefits  are  commonly  called  uses. 

Sometimes  benefits  consist  of  positive  advantages 
and  sometimes  of  the  prevention  of  disadvantaj^es. 
To  be  more  exact,  benefits  mean  cither  dciinihle 
cveith  obtainvd  or  iindc.slrahle  eivntt  averted  by  means 
of  wealth  or  human  beings.  For  example,  when 
a  loom  changes  yarn  into  cloth,  the  transformation 
is  a  desirable  change  due  to  the  loom ;  it  is  a 
benefit  conferred  or  performed  by  the  loom.  The 
benefit  from  a  plough  is  the  turning  up  of  the  soil. 
The  benefits  or  services  performed  by  a  bricklayer 
consist  in  the  laying  of  bricks.  The  benefits  or 
uses  conferred  by  a  ft  nee  around  a  farm  consist 
in  preventing  the  cattle  from  roaming  away.  The 
dikes  in  Holland  confer  the  benefit  of  keeping  out 
the  ocean.  The  benefits  conferred  by  a  diamond 
necklace  consist  in  its  pleasing  glitter. 

Benefits  may  be  measured  just  as  wealth  may  be 
measured,  although  the  units  of  measurement  are 
not,  of  course,  the  same.  The  measurement  of  ser- 
vices or  benefits  is  usually  rougher  than  that  of 
wealth,  because  it  is  more  difficult  to  establish  units 

9 


1 


WHY   IS  THE  DOLL^VR  SlIRINKINd?      [Cn.  I. 

of  mciisiin".  TIu'  slu'ltcr  of  n  limisc  and  the  use  or 
"wear"  «if  a  suit  of  clothis  arc  diffieult  to  measure 
aceuratt'ly.  To  save  tr(»ul>le,  benefits  are  usually 
measured  hy  llinr,  altlioujjh,  as  soon  as  it  becomes 
profitable  to  do  so,  the  tendency  is  to  establish  a 
more  satisfactftry  measure  "by  the  pier." 

()|)posed  to  the  benefits  of  wcali  ire  its  rmttt. 
(\)sts  may  Ih'  called  negative  benefits.  The  pur- 
pose of  wealth  is  to  benefit  its  owner;  that  is,  to 
cause  to  happen  what  he  desires  to  happen,  and  to 
prevent  from  hajjpeninK  what  he  desires  not  to 
happen.  liut  often  wealth  can  work  no  benefit  with- 
out entailing  some  cost,  i.e.,  preventinR  what  is 
desirable  or  occasioning  what  is  undesirable.  For 
instance,  one  cain\ot  enjoy  the  benefits  of  a  dwelling 
without  incurrijig  the  costs  of  taking  care  of  it. 

Costs  m.ay,  of  course,  be  measured,  just  as  benefits 
are  measured — by  numf)cr,  by  lli  »  or  Iv  '"ther 
appropriate  units;  and  costs,  when  thus  measured 
may,  by  price  and  value,  be  translated  into  terms 
of  money  precisely  like  the  opposite  items  —  bene- 
fits. 

\\\'  must  beware  of  assuming  that  cost  is  always  in 
the  form  of  an  expenditure  of  money.  Such  money 
cost  has  received  exaggerated  importance  in  the 
eyes  of  business  men  and  h.'s  tended  to  hide  the  more 
imiMirtant  and  fundamental  kind  of  cost,  luimely, 
la})()ur.  Even  labour  appears  to  the  employer 
in  the  guise  of  a  mone\-  cost  —  the  expenditure  of 
wages.     This    exj)enditure.  however,    is    not    itself 

10 


5  i-M 


IINDKKLVING   IDKAS 


liihoiir.  TlioM'  'Jill  iVrl  .1  rt'iil  liilxtiir  cost  urc  llu- 
liilMuircrs  tlicmsclvcs.  Ii  is  in  their  pliysicul  iiiid 
tiK'iital  exertions  tluit  t  iie  work  ot'  the  world  is  cliietly 
(lone. 

In  the  hist  anal\sis  payments  of  inoi;<-y  I'rotn  one 
nietnlxTot'  society  to  another  are  neither  inconie  nor 
outKo  U>  society  as  a  whole.     Vet  when  peoph-  talk 
of  the  cost  of   prodnction,   they    .isually   think  of 
money  payments.     The  items  called  co.ts  of  pro- 
duction are  mostly  payments  from  |)erson  to  person, 
at  various  sta^^es  of  production.     Kach  such   item 
is  two-faced  and,  in  the  final  total,  wipes  itself  oil" 
the  slate.     Tin-  only  ultiriate  item  of  cost  is  labour 
cost  or  rfforts;    that  is,  all  the  experiences  of  an  un- 
desirahle    nature    which    are    uiiderj^one    in    order 
that  experiences  of  a  desirable  nature  may  Ik-  se- 
cured.    In  the  last  anal\sis  inroiiir  roiiftififn  of  mfi,s- 
faHiom  and  outgo  of  cfforU  to  secure  satisfactions. 
Between    ellorls    au<i    satisiactions    may    intervene 
innuinerahle   payments   and   operations,   but   they 
all  must  cancel  out  in  the  end.     They  are  merely 
the    machinery    comiectin^    the    efforts   and    satis- 
factions.    This  is  evident  in  the  case  of  an  isolated 
in<lividual   like   kohinson   Crusoe,   who  handles  no 
money;    but  it  is  equally  true  of  the  most  hij,dily 
orf,'anized  socictN       It  is  only  obscured  by  the  fact 
that  each  member  of  such  a  society  talks  and  thinks 
in  terms  of  money. 

Our  real  income  is  the  receipt,  not  of  money,  but 
of  what  money  is  spent  for,  /.^,.  what  is  often  ca   ■  r 

11 


t» 


WHY   IS  THE   DOLLAR  SHRINKING?      [Ch.  I. 

our  "living,'."     That  is,  money  income  is  converted 
into  or  spent  for  real  income  in  tiie  form  of  food  and 
elotliing,  or  ratler  the  use  of  food  and  clothing,  and 
in  the  form  of  shelter,  amusements,  etc.,  i.e.,  the 
use  of  dwelling-houses  and  of  the  other  goods  con- 
tributing direct  benefits  to  human  beings.     These 
uses  include  the  necessaries,  comforts,  and  luxuries 
of  life.     The  more  money  income  it  costs  to  acquire 
a  given  amount  of  real  income,  the  higher  the  "  cost 
of  living."  of  which  we  hear  so  much  to-day.    The 
mone\-  which  the  workman  is  paid  in  wages  is  not 
his  real  wages,  but  only  his  nominal  wages.     The 
real  wages  are  the  workman's  living  't  which  that 

money  i>  spent. 

If  a  man  has  the  right  to  nil  the  prospective  bene- 
fits which  ma>-  come  in  the  future  from  a  particular 
article  of  wealth,  he  is  said  to  have  its  complete 
ownership,  or  its  ownership  without  encumbrance. 
If  he  has  a  right  to  t)nly  .tome  of  the  benefits  from  a 
particular  article  of  wealth,  he  is  said  to  own  that 
wealth   partially,  or  to   "have  an   interest"   in  it. 
When  two  brotluTs  own  a  farm  equally  in  partner- 
ship, each  is  a  part  owner ;  each  has  a  half  interest 
ii  the  farm ;  that  is,  each  has  a  right  to  half  of  the 
benefits  to  be  had  from  the  farm.     What  is  divided 
between  the  two  brothers  is  not  the  farm,  but  the 
benefits  of  the  farm.     To  emphasize  this  fact,  the 
law  describes  each  brother's  share  as  an  "  undivided 
half  interest."     Partnership  rights  are  usually  em- 
ployed only  when  the  number  of  co       >.ers  is  small. 

12 


2.] 


UNDERLYING   IDf]AS 


WTien  the  number  is  large,  the  ownership  is  usually 
subdivided  into  shares  of  stoek ;  but  the  prineiple  is 
the  sanv  , ,:'  h  i.idividual  owns  a  right  to  a  certain 
fraction   )f  tin  btutfit    which  come  to  the  owners. 

After  !,;  .piiintiti;'.;  of  property  of  different  kinds 
are  measured,  \\l  may  apply  the  same  concepts  of 
transfer,  exchange,  price,  and  value  which  have 
already  been  applied  to  wealth  and  benefits,  eacli 
particular  kind  being  measured  in  its  own  partic- 
ular uni*^.  Consid(>r,  for  example,  the  pr()])erty 
called  st«)ck  in  the  Pennsylvania  Railway  Compan.w 
This  is  measured  by  the  "number  of  shares,"  the 
share  here  being  the  unit  of  measurement. 

If  wealth  were  alw-as  owned  in  fee  simple,  i.e., 
if  there  were  no  division  of  ownership,  —  no  partner- 
ship rights,  no  shares  and  no  stock  companies,  — 
there  would  be  little  practical  need  to  distinguish 
property  from  wealth;  and  as  a  matter  of  fact, 
in  the  rough  popular  usage,  an\  article  of  wealth. 
and  especially  real  estate,  is  often  inaccurately 
called  a  "piece  of  property."  But  the  ownership 
of  wealth  is  frequently  divided ;  and  this  fact  neces- 
sitates a  careful  distinction  between  the  thing  owned 
and  the  rights  of  the  owners.  Thus,  a  railroad  is 
wealth.  Its  shares  and  bonded  debt  are  rights  to 
this  wealth.  Each  owner  of  shares  or  bonds  has 
the  right  to  a  tractional  part  of  the  benefits  from  the 
railway.  The  total  of  these  and  the  other  rights 
comprises  the  complete  ownership  of,  or  property 
in,  the  railway. 

13 


WHY   IS  THE   DOLLAR  SHRINKING?      [Ch.  I. 

Besides  the  distinction  between  wealth  and  prop- 
erty rights,  tinother  distinction  should  here  be  noted. 
This  is  the  distinction  between  property  rights 
and  certificates  oF  those  rif:;hts.  The  former  are 
the  rights  to  use  wealth,  the  latter  are  merely  tlie 
written  evidence  of  those  rights.  Thus,  the  right 
to  receive  dividends  from  a  railroad  is  property, 
but  the  written  paper  evidencing  that  right  is  a 
stock  certificate.  The  right  to  a  railway  trip  is  a 
property  right,  the  ticket  evidencing  that  right  is  a 
certificate  t  f  property.  The  promise  of  a  bank  is 
a  property  Hglit;  the  bank  note  on  which  that 
promise  is  engraved  is  a  certificate  of  property. 

The  tliree  really  important  and  fundamental 
concepts  which  have  been  defined  are  wealth,  bene- 
fits, and  property-.  As  each  of  them  appears  ex- 
plicitly in  exchange  for  money,  it  is  convenient  to 
employ  some  one  collective  term  to  embrace  them 
all.  The  term  we  shall  use  for  this  purpose  is 
"goods." 


i. 
I- 
I  - 

li 


*■  t 


14 


CHAPTER  II 

MOXEY 

§  1.  Money  Fallacies 

One  purpose  of  the  last  chapter  was  to  afford  a 
general  picture  of  the  various  kinds  of  goods  — 
wealth,  property,  services  —  with  which  we  meet 
in  commerce.  In  this  chapter  and  the  next  we  shall 
give  our  attention  to  that  particular  group  of 
goods  —  money  and  its  substitutes  —  for  which  all 
other  goods  are  commonly  exchanged. 

The  subject  of  the  present  chapter,  money,  is  be- 
set with  misunderstandings  and  faiiajies.  We  may 
as  well  pause  at  the  outset  to  mention,  although 
we  will  not  attempt  to  fully  explain  or  expose,  a  few 
of  the  most  common  and  persistent  money  fallacies 
and  confusions.  When  the  reader  has  finished  the 
book,  he  will  be  able  to  refute  their  fallacious  reason- 
ing for  himself. 

First  of  all  we  must  not  make  the  mistake  of 
confusing  money  with  wealth.  We  have  seen  that 
wealth  is  different  from  and  bigger  than  money. 
Yet  it  is  astonishing  how  easy  it  is  to  forget  this 
simple  fact.  One  reason  for  forgetting  it  is  because 
of  the  careless  use  of  words,  as  when  we  say  of  a 
rich  man  "he  has  a  great  deal  of  money."'  Few 
persons,  to  be  sure,  are  so  naive  as  to  iiiiagijip  that 

15 


WHY    IS   THE    DOLLAR   SHRINKIN'         .^h.  II. 

a  millionnairo  is  one  who  has  a  milhon  dollars  of 
aftual  rnolK^^•  stor.'d  away  ;  but  they  vaj^uely  assuine 
tiiat  somewhere  or  somehow  "he  has  the  money." 

Among    money    fallac-ies     is     the     idea    that    if 
one  man  "  makes"  money,  some  one  else  must  "lose" 
it,  since  there  is  only  a  fixed  stoc-k  of  money  in  the 
wi)rld,  and  it  seems  elear  that  "whatever  money 
the  moneN-maker  gets  must  come  out  of  some  one 
else's  pock't."     The  fiaw  in  this  reasoning  is  the 
assumption  that  gains  in  trade  are  simply  gains 
in  actual  money,  so  that  in  every  business  transac- 
tion only  one  party  can  be  the  gainer.     If  this  were 
true,  we  might  as  well  substitute  gambling  for  busi- 
ness' and  for  manufacturing ;    for  in  gambhng  the 
number  of  dollars  won  is  ecpial  to  the  number  of 
dollars  U)st.     As  a  matter  of  fact,  however,  it  is  not 
in   order  to  obtain   money   that   people   engage  in 
trade,  but  in  order  to  o})tain  wliat  money  will  buy, 
and  that  is  preciseb"  what  both  parties  to  a  normal 
transaction  eventually  do  obtain. 

Again,  some  persons  have  tried  to  prove  that  the 
people  of  the  earth  can  never  pa>  off  their  debts 
because  these-  debts  amount  to  more  than  the 
existing  supply  of  money.  "If  we  owe  money," 
it  is  argued,  "we  can't  pay  more  money  than  there 
is."  This  assertion  sounds  plausible,  but  a  moment's 
thought  will  show  that  the  same  money  can  be,  and 
in  fact  is.  paid  over  and  over  again  in  discharge  of 
several  different  debts ;  not  to  mention  that  some 
debts  are  paid  without  the  use  of  money  at  all. 

16 


1] 


MOXKY 


A  few  years  ago  at  a  meeting  of  the  American 
Economic  Association  a  Western  banker  expressed 
the  opinion  that  the  total  amount  of  money  in  the 
world  ought  to  he  equivalent  to  the  total  wealth  of 
the  world  ;    else,  he  suggested,  p(  )ple  would  never 
he  able  to  i)ay  their  debts.     He  explained  that  in 
the  Fnited  States  there  were  then  twenty  dollars 
of  wealth  for  every  dollar  of  money  ;  and  he  inferred 
that  therefore  there  was  but  one  chance  in  twenty 
of  a  debtor's  paying  his  debts.     "I  will  give  five 
dollars,"  he  said,  "to  any  one  who  can  disprove  that 
statement."     When  no  one  accepted  the  challenge, 
a  wag  suggested  that  it  wes  because  there  was  but 
one  chance  in  twenty  of  getting  the  promised  five 
dollars  !     The  attempt  to  equalize  money  and  wealth 
by  increasing  money  twenty-fold  would,  as  we  shall 
see    later,    prove   absolutely    futile.     The   moment 
we  increased  tlie  amount  of  money,  the  money  value 
of  all  other  forms  of  wealth  would  rise,  and  there 
would,  therefore,  still  be  a  discre{)ancy  between  the 
amount  of  money  and  the  money  value  of  wealth. 

A  very  persistent  money  fallacy  is  the  notion  that 
sometimes  there  is  not  enough  money  to  do  the 
world's  business,  and  that  unless  at  such  times  the 
quantity  of  money  is  increased,  the  wheels  of  busi- 
ness wiJl  either  stop  or  slacken  their  pace.  The 
fact  is,  however,  that  any  quantity  of  money, 
whether  large  or  small,  will  do  the  world's  business 
as  soon  as  the  hnel  of  prices  is  properly  adjusted 
to  that  quantity.  In  an  article  on  this  subject 
c  17 


WHY    IS   THK    UOLLAll   SHRIXKIN'C?     K'h.  II. 


ilf 


I  \ 


a  few  years  ago  an  editor  of  a  popular  magazine 
put  this  fallacy  into  the  very  title:    "There  is  not 
enough  money  in  the  world  to  do  the  world's  work." 
He  said,  "The  money  is  not  coming  out  of  the  ground 
fast  enough  to  meet  the  new  conditions  of  life." 
In  reality,  money  is  coming  out  of  tiie  ground  faster 
than  the  "  new  conditions  "  require  at  the  present  level 
of  prices,  with  the  consequent  result  of  raising  prices. 
A  more  subtle  form  of  money  fallacy  is  that  which 
admits  that  money   is   not  identical   with  wealth, 
but  contends  that  money  is  an  indispensable  means 
of   grtfing   wealth.     A    very   intelligent   gentleman 
recently  asserted  that  the  railways  of  this  country 
could  never  have  k-en  built  in  the  early  fifties  liad 
it  not  been  for  the  lucky  discovery  of  gold  in  Cali- 
fornia in  IS  19,  which  provided  the  "means  by  which 
we  could  pay  for  the  construction  of  the  railways." 
He  overlooked  the  fact  that  the  world  does  not  get 
its  wealth,  by  buying  it.     One  person  may  buy  from 
another;    but  the  \v;;rld  a;;  a  whole  does  not  buy 
wealth,  for  tiie  simple  reason  that  there  would  be 
no  one  to  buy  it  from.     The  world  gets  its  railways, 
not  by  buying  them,  but  by  building  them.     What 
provides  our  railways  is  not  the  gold  mines,  but  the 
iron  mines.     Eveu  though  there  were  not  a  single 
cent  of  money  in  the  world,  it  wt)uld  still  be  possible 
to  have  railways.     Tlie  gold  (>f  "alifornia  enriched 
those  who  discovered  it  bt>cause   it  enabled   them 
to  buy  wealth  of  others ;   but  it  did  nt)t  provide  the 
world    with    railways    any    more    than    Robinson 

18 


§  1.1 


MONEY 


Crusoe's  discovery  of  money  in  the  ship  provided 
him  with  food. 

If  money  could  make  the  world  rich,  we  should 
not  need  to  wait  for  gold  discove-ies.     We  could 
make  paper  money.     This,  in  fact,  has  often  been 
tried.     The  French  people  once  thought  thev  were 
going  to  get  rich  by  having  the  government  print 
unhmited    quantities    of    paper    money.     Austria, 
Italy,   Argentina,   Japan,    as   well    as   many   other 
countries,  including  the  American  colonies,  and  the 
United  States,  have  tried  the  same  experiment  with 
the  same  results  —  no  real  increase  in  wealth,  but 
simply  an  increase  in  the  amount  of  money  to  be 
exchanged  for  wealth. 

A  similar  and  very  common  fallacy  is  that  to  pro- 
mote thecirculationof  money  is  to  promote  the  acqui- 
sition of  wealth.     Frederick  the  Great  tried  to  justifv 
his  wars  on  this  ground.     In  a  letter  he  said  :  "  My 
numerous  armies  promote  the  circulation  of  money, 
and  disburse  impartially  among  the  provinces  the 
taxes  paid  by  the  people  of  t!,.  state."    The  idea  back 
of  such  statements  is  that  some  gain  is  secured  bv 
artificially  forcing  money  to  change  hands.    Of  course 
the  circulation  of  money  is  not.  of  itself,  of  anv  im- 
portance unless,  with  it,  occurs  an  increase  of  wealth. 
The  idea  that  money  is  the  essence  of  wealth  was 
one  of  the  ideas  which  gave  rise  to  a  set  of  doctrines 
and  practices,  called  Colbertism  or  Mercantilism 
constituting  the  eariiest  so-called  "school"  of  polit- 
ical economy.     Colbert  was  a  distinguished  minister 

19 


,„^^ 


WHY    IS   THK    DOLLAR   SIIRIXKIXG?    [Cu.  II. 

undtT  Louis  XIV  of  France  in  the  seventeenth 
century,  and  a  firm  believer  in  tlie  theory  tliat,  in 
order  to  be  wealthy,  a 'nation  must  have  an  abun- 
dance of  money.  Ilis  theory  became  know  n  as  Mer- 
cantilism because  it  rejjarded  trade  between  nations 
in  the  same  light  in  which  merchants  look  upon 
their  business  —  each  measurin}^  his  prosperity  by 
the  difference  between  the  amount  of  money  he  ex- 
pends and  the  amount  he  takes  in.  To  keep  money 
within  the  country,  ("olbert  and  the  Mercantilists 
advocated  the  policy  now  known  as  "protection." 

To-day  it  is  generally  understood   that,  in  trade 
between   nations,   as  in   that  between   individuals, 
both  parties  may  gain  in  an  exchange  transaction ; 
but  the  mercantilistic  fallacy  that  a  nation  may  get 
rich  by  selling  more  than  it  purchases,  and  collecting 
the  "favourable  balance  of  trade"  in   money,  st'M 
forms  one  of  the  popular  bases  of  protectionism  in 
the   United   States.     The   more  intelligent  protec- 
tionists give  quite  different  reasons  for  a  protective 
tariff,  but  the  old  fallacious  reason  still  appeals  to 
the  multitude.     They  continue  to  think  that  by 
putting  up  a  high  tariff  so  that  people  are  prevented 
from  spending  money   abroad  and  arc  compelled 
to  keep  it  at  home,  the  country  will  in  some  way  be 
made  richer.     One  reason  for  the  persistence  of  this 
fallacy  is  the  continued  use  of  the  misleading  phrase 
"favourable  balance  of  trade"  to  indicate  an  excess 
of  exports  over  imports,  and  "unfavourable  balance 
of  trade"  to  indicate  the  opposite  condition. 

20 


i! 
f  I 


§  l.I 


MOXKV 


There  is  a  common  money  fallacy  concerning  the 
rate  of  interest.     The  rate  of  interest  may  be  defined 
as  the  ratio  of  an  antnial  ))ayment  of  money  to  the 
himp  sum  of  money  wliich  that  animal  payment 
will  buy.     So  the  rate  of  interest  is  often  called  the 
"price  of  money,"  and  it  is  inferred  that  the  rate 
of  interest  depends  upon  the  (piantity  of  money  on 
the  market.     The  trade  journals  tell  us  that  "  money 
is  easy"  in  Wall  Street,   meaning  that  interest  is 
low,  or  that  it  is  easy  to  borrow  money.     Or  we  are 
told  that  "the  money  market  is  tight,"   meaning 
that  it  is  hard  to  borrow  money.     We  often  hear  the 
argument  that  the  present  high  cost  of  living  cannot 
be  due  to   any  plentifulness  of  money,  because  if 
money  were  rea'ly  plentiful,  it  would  be  "cheap," 
i.e.,  the  rate  of  interest  would  be  low.     Probably 
the  great  majority  of  unthinking  business  men  be- 
lieve that  interest  is  low  when  money  is  plentiful, 
and  high  when  money  is  scarce.     But  this  view  is 
fallacious  and  does  not  agree  with  the  facts. 

We  ist  remember  that  interest  is  not  only  the 
price  of  money,  but  also  the  price  in  money.  Thus  the 
rate  of  interest  is  found  by  dividing,  say,  the  So  paid 
per  year  by  the  SlOO  cash  for  which  it  is  paid.  Both 
the  numerator  and  the  denominator  of  this  fraction 
are  expressed  in  terms  of  money.  Inflation  of  mone>- 
ultimately  works  equally  on  both  sides. 

We  should  beware  of  the  phrase  "the  price  of 
money,"  for  it  has  two  meanings.  It  may  mean  the 
rate  of  interest,  which  is  a  ratio  of  exchange  between 

21 


.'jS^ 


WHY    [S   TMK    DOLLAR   smilXKI\(3 '.'    (Cii.  II. 

two  moneys — the  price  of  iiu)iiey  capital  in  terni3 
of  money  income;  or  it  may  mean  tiie  jniTciumng 
puiirr  of  money  over  other  j;oo(ls — the  amount 
of  other  floods  for  wiiich  a  ^^iveii  amount  of  money 
can  be  exchanged.  Tl  '  abundance  of  money  will, 
as  we  shall  .see,  reduce  its  price  in  the  latter  sense 
of  |)urchasinf;  })o\ver  over  j^oods,  but  it  need  not  on 
that  account  reduce  its  price  in  the  former  sense  of 
tlie  rate  of  interest.' 

We  ^hall  find  that  tiie  real  importance  of  the 
quantity  of  money  lies,  not  in  the  so-calle<l  money 
market  —  the  loan  market  —  but  in  the  j;eneral 
level  of  prices.  Curiously  enoujih,  in  the  popular 
mind  the  exact  ojjposite  is  commonly  su;)posed. 
It  is  believed  that  money  greatl\  affects  the  money 
market,  but  has  little  or  nothinj;  to  do  with  the  high 
cost  of  living. 

Money  fallacies  of  the  kinds  we  have  described 
must  be  carefully  avoided.  We  should  be  on  our 
guard  against  every  proposition  concerning  money. 
"Making"  money,  for  instance,  is  a  catch  phrase, 
used    without   any    definition.     Properly    speaking, 


» ()nt>  reason  for  this  idea  is  that  a  hanker  usually  looks 
upon  money  in  relation  to  his  reserves,  if  the  hank  re- 
serve is  low,  he  raises  the  rate  of  interest  to  "protect" 
his  reserve,  wliile  if  the  reserve  is  ahundant,  ho  reduces 
the  rate  of  interest  in  order  to  reduce  the  reserve.  Tho 
banker  is  constantly  watching  his  reserve,  and  h.as  to 
adjust  th(>  rate  of  interest  with  respect  thereto.  Hut  h« 
should  not  judsre  the  amount  of  money  in  circulation  by 
the  amount  of  money  inside  his  vaults. 

22 


i  -•  I 


MONEY 


nobody  can  "make"  money  except  the  man  in  the 
mint.  The  rest  of  us  may  gain  wealth,  but,  unless 
we  are  counterfeiters,  we  cannot  literally  "make" 
money. 

We  live  in  a  complicated  civilization  in  which 
we  talk  in  terms  of  money.  Money  has  come  to  l)o 
a  sort  of  veil  which  hides  the  other  and  more  impor- 
tant wealth  of  the  world. 

§  2.   Prices  i  *  General  and  in  Particular 

The  chief  purpose  of  this  book  is  to  study  the  pur- 
cha.siiig  power  of  a  mondnry  unit — let  us  .say, 
the  dollar.  But  the  purchasing  power  of  the  dollar 
is  simply  the  reciprocal  of  the  grneral  lei'el  of  pricen. 
To  say  that  prices  have  doublefl  is  the  same  thing 
as  to  say  that  the  purchasing  power  of  the  dollar 
has  Ik-cu  cut  in  two.  Our  prol)lem  is  therefore 
simply  to  study  the  general  principles  which  deter- 
mine the  rise  (»r  fall  of  prices,  a  subject  which  to-day 
is  receiAing  world-wide  attention  under  the  head 
of  the  "high  cost  of  living." 

Unfortunately  few  of  those  people  who  talk  so 
glibly  about  the  high  cost  of  living  realize  the  mone- 
tary side  of  the  problem.  Xot  only  do  they  fix 
attention  on  the  goods  side,  but  they  make  the  mis- 
take of  thinking  that  a  general  rise  of  prices  is  ex- 
plainable on  the  same  principles  of  supply  and  de- 
mand as  apply  to  the  rise  of  a  pnrticuhir  price. 
They  think  that  they  can  explain  the  general  rise 
of  prices  by  explaining  the  rise  of  each  individual 

23 


il 


WHY    IS   THK    nol.LAK   SHKINKINCJ:'    (C'h    II. 

price.  One  triiglit  as  well  try  to  cxpliiin  the  rise 
of  the  tides  by  ohserviiij?  the  causes  which  raise  up 
individual  waves. 

The  truth  is  that  so  far  from  the  penerai  level  of 
prices  (h'peiiditij;  on  individual  prices,  each  individual 
price  dept'iids  in  part  on  the  general  level  of  prices. 

Thus  the  price  of  supar  is  a  ratio  In'tween  sugar 
and  money.  Any  one  who  ])uys  sugar  balances 
in  his  mind  the  im])ortance  of  the  sugar  to  him  as 
against  the  importance  <  f  the  money  which  he  has 
to  pay  for  it.  In  making  this  comparison,  the 
money  stands  in  his  mind  fur  the  oihvr  Ihiixjx  which 
it  might  hmj  if  not  apvnt  Jor  .iiigar.  If  this  (friirral 
purchasing  power  of  the  dollar  is  great,  money  will 
seem  precious  in  his  mind,  and  he  will  he  more  loath 
to  part  with  a  given  amount  of  it  for  sugar  than  if 
its  pure  luising  power  over  other  things  is  small ; 
that  is,  the  greater  the  power  of  money  to  purchase 
things  in  general,  the  less  of  it  will  l)e  oil'ered  for 
sugar  in  particular,  and  the  lower  the  price  of  sugar 
will  therefore  become.  In  other  words,  the  lower 
the  general  i)rice  level,  the  lower  will  be  the  price 
of  sugar.  In  still  other  words,  the  price  of  sugar 
must  sipiipnthizr  with  prices  in  general.  If  they  are 
high,  it  will  tend  to  be  high,  and  if  they  are  low,  it 
will  tend  to  be  low.  Before  the  purchaser  of  sugar 
can  decide  how  much  money  he  is  willing  to  exchange 
for  it,  he  mu.st  have  some  idea  of  what  else  lie  could 
buy  for  his  money. 

This  explains  why  a  traveller  feels  at  first  so  hclp- 

24 


I  '< 


s  ■■«  I 


MONKV 


less  ill  a  f(»rcij;ii  coimtry  wlicii  lie  is  told  tlir  prices 
of  piods  in  terms  of  iiiifiiiniliar  units.  If  the  trav- 
eller has  never  heard  before  of  kronen.  k"1<1<''i. 
rubles,  or  inilreis,  any  prices  e\j)ressed  in  these  units 
will  mean  nothinjjto  him.  He  cannot  say  how  many 
of  any  one  of  these  unit>  he  is  willing  to  pay  for  any 
given  article  until  he  knows  liuw  the  piircha^iiiK' 
power  of  that  unit  compares  witli  the  unit  to  which 
he  is  accustomed.  There  nnist  alwa\>  be  in  the 
minds  of  those  who  use  money  some  idea  of  its 
purchasing  power.  This  needs  emptuisis  because 
it  is  .so  often  overlooked.  .Mthough  the  purchasing 
power  of  money  is  as>umed,  we  are  usually  as  uncon- 
scious of  it  as  we  are  of  the  background  <.f  a  picture 
agamst  which  we  see  and  unconsciously  .uu'asure 
the  figures  in  the  foregrou!id. 

Let  us.  then,  once  for  all,  give  up  any  thoujjht  of 
studying  the  prices  in  the  price  lev.l  singly,  and 
in.stead,  consider  them  in  the  mass.  We  shall  see 
that  it  is  a  question  of  the  flow  of  money  and  its 
substitutes,  and  the  flow  of  goods  in  niurn  for  them. 
It  is  just  as  poss!l)Ie  to  study  the  gt-iieral  level  of 
prices  independently  of  particular  prices  as  it  is 
to  study  the  general  tides  of  the  oeean  independently 
of  its  particular  waves.  To  do  this,  however,  will 
require  a  study  of  moiiev. 


§  3.   The  Nature  of  Money 

It  is  a    very  curious  fact  that  money,  though  a 
most  convenient  de\  ice  in  practice,  is  always  a  stum- 

25 


i 


I 


WHY    IS  THE    DOLLAR  SHRINKING?    [Ch.  II. 


bling-block  ui  theory.  At  the  beginning  of  this 
chapter  we  pointed  out  some  of  the  imagined 
functions  of  money  that  do  not  belong  to  it. 
We  are  now  ready  to  ask:  What  are  the  real 
functions  of  money  ? 

We  have  defined  money  primar  ly  as  wealth 
geveralhf  acceptable  in  exchange.  But  when  this 
definition  was  framed  we  had  not  yet  defined  prop- 
erty rights  as  a  form  of  goods  distinguishable  from 
concrete  wealth  ;  and  these  rights,  especially  in  the 
form  of  bank-.:otes,  are  also  generally  acceptable 
in  exchange.  We  therefore  now  extend  our  defini- 
tion .'<■  money  to  include  all  goodfs  generally  accept- 
able in  exchange  for  other  goods.  The  term  money 
is  also  used  loosely  to  refer  to  the  certificate  of  such 
property  right.  Thus  we  generally  think  of  the 
paper  bank-note  itself  as  money  rather  than  the 
right  which  it  certifies. 

The  facility  with  which  money  may  be  exchanged 
or  its  general  acceptability  is  the  chief  characteristic 
of  money.  This  general  acceptability  may  be  re- 
enforced  by  law,  the  money  thus  becoming  "legal 
tender."  '  But  such  reenforcement  is  not  essential. 
All  that  is  necessary  in  order  that  any  good  may  be 
money  is  that  general  acceptability  shall  attach  to 
it.  On  the  frontier,  without  any  legal  sanction, 
money    is   sometimes   gold   dust   or   gold    nuggets. 

'  Lcgal-lrndf't-  money  is  money  wliicli  may  be  legally 
tendered  or  offered  l)y  a  delitor  to  his  creditor  in  discharge 
of  any  debts  expressed  in  terms  of  money. 

2(j 


'"m 


13] 


MONEY 


In  the  colony  of  Virginia  it  was  tobacco.    Among 
the  Indians  in  New  Enghmd  it  was  wampum. 

How  does  it  happen  that  any  particular  commod- 
ity comes  into  use  as  money  ?  Not  originally  be- 
cause a  government  so  decreed,  but  because  the 
commodity  was  readily  salable  on  account  of  its  utility 
for  direct  commodity  uses  quite  other  than  monetary. 
It  is  not  likely  that  the  monetary  use  was  at 
first  even  thought  of.  It  simply  grew  gradually. 
Thus  gold  was  readily  sold  and  resold.  Many 
wanted  it  for  jewellery,  and  many  others  could 
easily  be  induced  to  accept  it  in  exchange,  even  if 
they  had  no  personal  use  for  it  themselves ;  for  they 
knew  they  could  resell  it  at  any  time  to  some  one 
who  had  such  a  use  for  it.  Gradually  it  became 
customary  to  accept  it  with  no  thought  of  any  other 
use  than  to  resell  it  or  pass  it  on  indefinitely.  Gold 
has  finally  survived  as  the  most  important  form  of 
money.     It  is  easily  transportable  and  is  durable. 

Practically  all  metallic  money  to-day  in  civilized 
countries  is  "coined,"  but  uncoined  gold  nuggets  or 
bars  are  just  as  truly  money  if  they  are  generally 
acceptable  in  exchange.  At  bottom,  coining  is  merely 
putting  on  a  certification  of  weight  and  fineness. 
"Coining"  puts  the  finishing  touch  on  money  as 
distinct  from  other  exchangeable  goods.  As  long 
as  money  is  still,  let  us  say,  gold  nuggets  or  gold 
dust,  there  is  nothing  definitely  to  distinguish  it 
as  money  from  other  goods  of  high  exchange- 
ability except  its  higher  exchangeability,  or,  to  put 

27 


^^smm^m^^^jkT> 


WHY    IS  THE    DOLLAR   SHRINKING?    [Ch.  II. 

it  in  another  way,  there  is  little  reason  why  other 
articles  almost  as  exchangeable  as  the  gold  nuggets 
and  gold  dust  should  not  be  called  money. 

In  the  pre-coinage  stage  the  world  was  in  a  tran- 
sition period  between  a  system  of  barter  and  a 
system  of  purchase-and-sale.  Gradually  barter 
became  obsolete  because  of  its  inconveniences  and 
annoyances;  thus  under  the  preexisting  system  of 
out  and  out  barter  in  which  every  article  is  exchanged 
directly  against  every  other,  there  were  between  ten 
articles  45  price  ratios  as  against  10  if  money  were 
used;  between  one  hundred  articles  there  were 
4950  such  ratios  instead  of  100.  Alfred  Russell 
Wallace,  when  travelHng  in  the  Malay  Archipelago, 
where  only  barter  existed,  had  to  keep  on  hand  a 
supply  of  knives,  cloth,  sago,  and  numerous  other 
commodities  in  order  to  be  able  to  do  any  trad- 
ing- .    , 

Barter  is  also  inconvenient  because  some  of  the 

various  goods  which  have  to  be  used  —  for  example, 
knives  —  are  not  easily  subdivided. 

Nevertheless,  barter  is  not  yet  entirely  extinct 
and  probably  never  will  be.  Farm  labour  is  partly 
paid  in  farm  products,  and  country  clergymen  are 
sometimes  paid  by  their  parishioners  in  the  produce 
of  their  farms.  In  factory  towns  the  employees 
are  sometimes  paid  in  "truck"  at  "the  company 
store."  In  fact,  even  in  the  most  highly  organized 
and  modern  markets  with  every  monetary  and  credit 
facility-,   barter   is  still   practised  in  certain  cases. 

28 


S  3.] 


MONEY 


Servants  receive  part  of  their  pay  in  board  and  lodg- 
ing. Other  occasional  sporadic  cases  of  barter  are 
of  daily  occurrence.  Yet  these  cases  are  insignifi- 
cant in  comparison  with  the  colossal  exchanges 
effected  by  money  and  checks. 

There  are  various  degrees  of  exchangeability  which 
must  be  transcended  before  we  arrive  at  real  money. 
Of  all  kinds  of  goods,  one  of  the  least  exchangeable 
is  real  estate.     It  is  often  difficult  to  find  a  person 
who  wants  to  buy  a  particular  piece  of  real  estate. 
A  mortgage  on  real  estate  is  one  degree  more  ex- 
changeable.    Yet  even  a  mortgage  i^  less  exchange- 
able than  a  well-known  and  safe  corporation  security 
or  a  government  bond.     One  degree  more  exchange- 
able than  a  government  bond  is  a  time  bill  of  ex- 
change ;  one  degree  more  exchangeable  than  a  time 
bill  of  exchange  is  a  sight  draft ;    while  a  check  is 
almost  as  exchangeable  as  money  itself.    Yet  no 
one  of  these  is  really  money ;  for  none  of  them  is 
"generally  acceptable." 

If  we  confine  our  attention  to  p.csent  and  normal 
conditions,  and  to  those  means  of  exchange  which 
either  are  money  or  most  nearly  approximate  it, 
we  shall  find  that  money  itself  belongs  to  a  general 
class  of  goods  which  we  may  call  "  circulating  media." 
Circulating  media  may  be  any  kind  of  goods  whicli, 
whether  generally  acceptable  or  not,  do  actually,' 
for  their  chief  purpose  and  use,  serve  as  a  means 
of  exchange. 
Circulating  media  consist  of  two  chief  classes: 

29 


'^AL 


WHY    IS   THE    DOLLAR   SHRINKING?    [Ch.  II. 

(1)  money ;  (2)  bank  deposits.  By  means  of  checks, 
bank  deposits  serve  as  a  means  of  payment  in  ex- 
change for  other  goods.  A  check  is  the  evidence 
of  the  transfer  of  bank  deposits.  It  is  acceptable 
to  the  payee  only  by  his  consent.  It  would  not 
be  generally  accepted  by  strangers.  Yet  by  checks, 
bank  deposits,  even  more  than  money,  do  actually 
serve  as  a  medium  of  exchange.  In  this  country, 
bank  deposits  subject  to  check,  or,  as  they  are  some- 
times called,  "deposit  currency,"  perform  over 
90  per  cent  of  all  exchange  transactions. 

But  although  a  bank  deposit  transferable  by  check 
is  included  in  circulating  media,  it  is  not  money. 
A  bank  note,  on  the  other  hand,  is  both  circulating 
medium  and  money.  Between  these  two  lies  the 
final  line  of  distinction  separating  what  is  money 
and  what  is  not.  The  line  is  delicately  drawn, 
especially  in  the  case  of  such  checks  as  cashier's 
checks  or  certified  checks;  for  the  latter  are  ex- 
tremely similar,  in  respect  to  acceptability,  to  bank- 
notes. Each  is  a  demand  liability  on  a  bank,  and 
each  confers  on  the  holder  the  right  to  draw  money. 
Yet  while  a  bank-note  is  generally  acceptable  in 
exchange,  a  check  is  acceptable  only  by  special 
consent  of  the  payee.  Real  money  is  what  a  payee 
accepts  without  question,  because  he  is  induced 
to  do  so  either  by  "legal  tender"  laws  or  by  a  well- 
established  custom  or  both. 

Of  real  money  there  are  two  kinds:  primary 
and  fiduciary.     Money  is  called  primary  if  it  is  a 

30 


13.) 


MONEY 


commodity,  any  given  unit  of  which  has  just   as 

niucli  value  in  some  other  use  as  it  has  in  monetary 

use ;  that  is,  primary  money  is  a  commodity  which 

has  its  full  value  even  if  it  is  not  used  as  money  or 

even  if  it  is  changed  to  a  form  in  which  it  will  not 

circulate  as   money.     For  instance,   gold  coins  in 

the  United  States  are  primary  money,  since  their 

value  will  be  undiminished  even  if  they  are  melted 

into  gold  bullion.     In  the  same  way,  the  tobacco 

money  of  Virginia  in  colonial  days  was  primary, 

having  as  much  value  as  tobacco  as  it  had  as  money. 

Fiduciary  money,  on  the  other  hand,  is  money 

the  value  of  which  depends  partly  or  wholly  on  the 

owner's   confidence   that   he   can   exchange   it   for 

primary  money,  or  at  any  rate  for  other  goods,  e.g., 

for  i)rimary  money  at  a  bank  or  government  office 

or  for  discharge  of  debts  or  purchase  of  goods  of 

merchants.'     For  instance,  a  silver  dollar  in  the 

United  States  is  fiduciary  money,  since  it  is  worth 

a  dollar  only  because  of  the  public  confidence  that 

the  government  will  take  it  in  taxes  and  the  people 

in  discharge  of  debts  and  for  other  purposes  on  equal 

terms  with  a  dollar  of  gold.     If  a  silver  dollar  be 

melted  into  bullion,  it  will,  unlike  the  gold  dollar, 

'  Some  economists  have  proposod  that  what  is  hero 
called  '-fiduciary"  money  should  not  he  called  money  at 
all;  that  is,  that  the  terra  "money"  should  bo  restricted 
to  primary  money.  It  seems  preferable,  however,  here  as 
elsewhere,  to  follow  ordinary  usaf,'e.  There  an>  instances 
where  countries  have  for  a  time  ha '  "o  primary  money, 
but  only  fiduciary  money. 

31 


r 


mm 


'■AyRp-'K  "^''^T*!.  (T  f^':-     ^M 


I! 

i 


WHY    IS  THE   DOLLAR  SHRINKING?    [Ch.  II. 

lose  a  large  part  of  its  value.  That  is,  the  bullion 
in  a  silver  dollar  is  not  worth  a  dollar ;  it  is  only 
worth  about  forty  cents.  Our  other  silver  coins 
are  worth  as  bullion  even  less  in  proportion  to  their 
value  as  money,  and  our  nickel  and  bronze  coins 
are  worth  still  less  in  proportion.  Bank-notes, 
government  notes,  and  other  forms  of  paper  money 
are  still  more  striking  examples  of  fiduciary  money, 

being  practically 
worthless    as 
paper,  but  hav- 
ing a  high  value 
as  money,  owing 
to  the  confidence 
that  they  can  be 
exchanged     for 
gold  at  the  banks 
or    the    govern- 
ment    treasury. 
The  larger  part 
of  the  money  in 
use  in  the  United 
States  is  fiduciary  money,  the  chief  examples  being 
silver  dollars,  fractional  silver,  minor  coins,  silver 
certificates,  gold  certificates,  government  notes  (nick- 
named "  green-backs  ") ,  and  bank-notes.     The  exact 
nature  of  these  various  kinds  of  money  constitutes 
a  subject  outside  the  purpose  of  this  book.     The 
reader  can,  however,  learn  much  as  to  their  nature 
fur  himself,  by  reading  tlie  inseriptions  on  the  various 

32 


Deposits  subject 

TO  CHECK 

BiLUlONS 


FmuCIARY 
MONEY 

MOWEY 

BlLklON 


Fio.  1 


'i.^Mmm- 


i  3.) 


MONEY 


forms  of  money,  which,  from  time  to  time,  pass 
through  his  hands. 

The  quahties  of  primary  money  which  make  for 
exchangcabihty  are  numerous.  The  most  important 
are  portabihty,  durabihty,  and  divisibih'ty.  The 
chief  quahty  of  fiihiciary  money,  which  makes  it 
exchangeable,  is  its  redeeniabihty  in  primary  money, 
or  else  its  imposed  character  of  "legal  tender." 

iMgure  1  indicates  the  classification  of  all  cir- 
culating media  in  the  United  States.  It  shows 
that  the  total  amount  of  circulating  media  is  slightly 
over  ten  billions,  of  which  eight  and  one-half  billions 
are  bank  deposits  subject  to  check,  and  one  and  two- 
thirds  billions,  money ;  and  that  of  this  one  and 
two-thirds  billions  of  money  one  billion  is  fidu- 
ciary money  and  only  two-thirds  of  a  billion  primary 
money. 


33 


'0 


-:^ 


CHAPTER  III 

THE  EQUATION  OF  EXCHANGE 

§  1.  Arithmetical  Illustration 

In  the  present  chapter  we  shall  study  the  pur- 
chasing power  of  money  in  a  preliminary  way,  ex- 
cluding the  consideration  of  bank  deposit  —  or 
check  —  circulation  and  confining  our  attention  to 
the  circulation  of  money,  primary  and  fiduciary. 
In  the  United  States  our  only  primary  money 
is  gold  coin.  The  fiduciary  money  includes  token 
coins  and  paper  money. 

Checks  aside,  we  may  classify  exchanges  into  three 
groups :  the  exchange  of  money  against  money ;  or 
"changing  money"  ;  the  exchange  of  goods  against 
goods, or  "barter";  the  exchange  of  money  against 
goods,  or  purchase  and  mh\     Only  the  last-named 
species  of  exchange  involves  wiiat  we  call  the  v'lrcu- 
lation  of  money.     The  circulation  of  money  signifies, 
therefore,   the   aggregate   amount   of   its   transfers 
against  goods.     All  money  held  for  circulation,  i.e., 
for  use  in  payment  for  goods  purchased,  is  called 
vioncy  in  circulation.     Tliis  includes  the  money  in 
the  pockets  and  purses  of  the  people  and  in  the  tills 
and  safes  of  merchants.     In  the  United  States  this 
includes  all  money  except  what  is  in  the  vaults  of 
the  banks  and  of  the  United  States  government. 

34 


S  l.j         THE   EQUATION   OF    EXCHANGE 


If  for  the  present  we  overlook  the  infliieiiee  of 
cheeks,  we  niiiy  say  that  thi'  price  h'vel  dcperHls  on 
only  three  sets  of  causes  :  (1)  the  quantity  of  money 
in  circulation;  (2)  its  "efficiency"  or  velocity  of 
circulation  (or  the  average  number  of  times  a  year 
a  dollar  is  exchanged  for  gotxls) ;  and  (3)  the  volume 
of  trade  (or  amount  of  goods  per  year  bought  by 
money).  The  so-called  "quantity  theory"  (i.e., 
the  theory  that  prices  vary  proportionally  to  money) 
has  often  been  incorrectly  formulated,  but  it  is  at 
least  correct  in  the  sense  that  the  level  of  prices 
varies  directly  with  the  quantity  of  money  in  cir- 
culation, provided  the  velocity  of  circulation  of 
that  money  and  the  volume  of  trade  effected  by 
means  of  it  are  not  changed.  This  theory  will  be 
made  clearer  by  the  "equation  of  exchange,"  which 
is  now  to  be  explained. 

The  equation  of  exchange  is  a  statement,  in 
mathematical  form,  of  the  total  transactions  effected 
in  a  certain  period  in  a  given  community.  It  is 
obtained  simply  by  adding  together  the  equations 
of  exchange  for  all  individual  transactions.  Sup- 
pose, for  instance,  that  a  person  buys  10  pounds 
of  sugar  at  7  cents  per  pound.  This  is  an  exchange 
transaction,  in  which  10  pounds  of  sugar  have  been 
regarded  as  equivalent  to  70  cents,  and  this  fact 
may  be  expressed  thus :  70  cents  =  10  pounds 
of  sugar  multiplied  by  7  cents  a  pound.  Every 
other  sale  and  purchase  may  be  expressed  similarly, 
and  by  adding  them  all  together  we  get  the  equation 

35 


i 


.»^    .w 


{ 


WHY    IS   THE   DOLLAR   SHRINKINC?    [rii.  III. 

of  exchange /or  n  ccrfnin  ver'md  inagiirii  cnnimnriify. 
That  is,  the  left  side  of  this  etiuation  represents  all 
the  money  spent  and  the  right  represents  the  value 
of  all  goods  bought  within  the  given  i)eriod.  Dur- 
ing this  period,  however,  the  mme  money  may  serve, 
and  usually  does  serve,  for  ffnrral  transactions. 
For  that  reason,  the  left,  or  money,  side  of  the  equa- 
tion is,  of  course,  several  times  the  total  amount  of 
money  in  circulation.  The  money  side  may  evi- 
dently be  considered  as  the  product  of  the  quantity 
of  money  multiplied  by  the  rapiditj-  of  its  circula- 
tion, i.e.,  the  number  of  times  it  is  exchanged  for 

goods. 

The  important  magnitude  called  the  velocity  of 
circulation  or  rapidity  of  turnover  means  simply 
the  quotient  obtained  by  dividing  the  total  money 
payments  for  goods  in  the  course  of  a  year  by  the 
average  amount  in  circulation  in  an  entire  com- 
munity and  is  a  sort  of  average  of  the  rates  of  turn- 
over of  diflferent  persons.  Each  person  has  his  own 
rate  of  turnover,  which  he  can  readily  calculate  by 
dividing  the  amount  of  money  he  expends  per  year 
by  the  average  amount  he  carries.  The  goods  side 
of  the  equation  is  made  up  of  the  quantities  of  goods 
multiplied  by  their  respective  prices. 

Ltt  us  begin  with  the  money  side  of  the  equation 
of  exchange.  If  the  number  of  dollars  of  money  in 
a  country  is  5,000,000,  and  the  average  velocity  of 
circulation  of  these  five  million  dollars  is  twenty 
times  per  year,  then  the  total  amount  of  money 

36 


^^ 


J  1 1         THE    EQUATION   OF    EXCHANOE 


exjH'iided  (for  goods)  during  any  year  is  So.OOO.OfK) 
X  20,  or  S10(),(M)0,(HX).  This  is  the  money  side  of  the 
equation  of  exchange. 

Since  the  money  side  of  the  equation  is  S100,0()(),- 
000,  thv  goodt  side  must  be  the  same.  For  if  SKK),- 
(M)O.OOO  has  been  spent  for  goods  in  the  course  of 
tlie  year,  tlien  SIOO.OOO.OOO  worth  of  goods  must 
have  been  sold  in  that  year.  In  order  to  avoid  the 
necessity  of  writing  out  the  quantities  and  prices 
of  the  innumerabk'  varieties  of  goods  which  are 
iictually  exchanged,  let  us  assume  for  the  present 
that  there  are  only  three  kinds  of  goods  —  bread, 
coal,  and  cloth  ;  and  that  the  sales  are  :  — 

200,(KK),{XX)  loaves  of  bread  at  $.10  a  loaf, 
10,000,(X)()  tons  of  coal  at  S').0()  a  ton,  and 
30,000,000  yards  of  cloth  at  81 .00  a  yard. 

The  total  value  of  these  transactions  is  evidently 
Sl()0,()()a,0(K),  i.e.,  S20.()()(),()0()  worth  of  bread  plus 
.S.")O,O(K),()0()  worth  of  coal  plus  .§30,000,000  worth 
of  cloth.  The  equation  of  exchange,  therefore,  is 
as  follows :  — 

§5,000,000  X  20  =  200,000,000  loaves  X  $  .10  a  loaf 
+  10,000,000  tons  X  So.OO  a  ton 
+  30,000,000  yards   X  $1.00  a  yard. 

This  equation  contains,  then,  on  the  money  side 
two  magnitudes:  (1)  the  quantity  of  money,  and 
(2)  the  ininiber  of  times  it  circulates  or  is  "turned 
over"  in  a  year;  and  on  the  goods  side  two  groups 
of  magnitudes  in  two  columns:    (1)  the  quantities 

37 


f 


WHY    IS  TIIR    DOLLAR   SUlUNKIN'Cr.'    |(  ir    IIJ. 


of  ROfxls  exchaiiKitl  in  a  yonr  (loaves,  tons,  yards), 
and  (2)  the  prices  of  th*'se  goods  (S.IO  per  loaf. 
$'y.m  per  ton.  and  .SI.(M»  per  yard).  The  Cfiuation 
shows  that  the-^e  four  sets  of  magnitudes  are  nuj- 
tually  related.  Beeausi'  this  etpiation  must  l)e 
fulfilled,  the  prices  must  l)ear  a  relation  to  the  three 
other  sets  of  magnitudes  —  quantity  of  money, 
rapidity  of  circulation,  and  quantities  of  goods  ex- 
changed. Consequently,  these  prices  must,  as  a 
whole,  vary  proportionally  with  the  quantity  of 
money  and  with  its  velocity  of  circidation,  and  in- 
versely with  the  quantities  of  goods  exchanged. 

Suppose,  for  instance,  that  the  (piantity  of  money 
were  doubled,  while  its  velocity  of  circulation  and 
the  qiumtity  of  goods  exduuiged  remained  the  same. 
Then,  since  the  ecpiation  of  exchange  mvst  con- 
tinue to  hold  true,  it  would  he  quite  impossible  for 
prices  to  remain  unchanged.  The  money  side  would 
now  be  S10,(K)(),U(MJ  X  -*(>  times  a  year,  or  S200,- 
000,000;  whereas,  if  prices  should  not  change, 
the  goods  would  remain  .S100,0(H),0(K)  and  the 
equation  would  be  \  iolated.  Since  exchanges, 
individually  and  collectively,  always  involve  an 
equivalent  quid  pro  (jtio,  the  two  sides  must  be 
equal.  Thereft)re,  under  the  given  conditions, 
prices  must  change  in  such  a  way  as  to  raise  the 
goods  side  from  .S100,(M)0,()(V»  to  .S-J()0,(M)0.000.  This 
doubling  may  be  accomplished  by  an  even  or  by  an 
uneven  rise  of  prices,  but  some  sort  of  a  rise  of  pricr.f 
there  must  be.     If  the  prices  rise  evenly,  they  will 

38 


i  I  1         TIIK    K(^UATI()N    OF    KXCHANOK 

evidently  all  Ik-  exactly  doubled,  so  that  the  equa- 
tion will  read  :  — 

$in,(K)(),()0()  X  I'O  -  •.'(M),()<»(),(HM)  loavfs  X  S  .L'O  jXT  loaf 
-j-  1(),(MH»,(M)0  tons  X  $in.(K)  prr  ton 
+    ;i(),(H)(>,(KH)  yanls    X  8  l.'.(K)  fxr  ynrd. 

If  the  prices  rise  unevenly,  the  doubling  must  evi- 
dently be  hronj^ht  alMUit  by  eompensatioii ;  if  some 
priees  rise  by  less  than  double,  others  must  rise 
by  enou>,d)  more  than  double  to  exactly  compensate. 

But  whether  all  prices  increase  uniformly,  each 
beinj;  exactly  double,  or  some  ])ri(cs  increase  niore 
and  some  less  (so  as  still  to  double  the  total  money- 
value  of  the  Koods  purchased),  the  prices  arc  doubled 
on  the  (ivrragc.  This  proposition  is  usually  expressed 
by  saying  that  the  "jjenenil  level  of  prices"  is  raised 
twofold.  From  the  mere  fact,  therefore,  that  the 
money  spent  for  j^oods  iinist  eqiial  the  quantities 
of  those  «?oods  multiplied  by  their  prices,  it  follows 
that  the  level  of  priees  must  rise  or  fall  according 
to  changes  in  the  (juantity  of  money,  )i)ih'.sn  there 
are  changes  in  its  velocity  of  circulation  or  in  the 
quantities  of  goods  exchanged. 

Just  as  changes  m  the  quantity  of  money  affect 
prices,  so  will  changes  in  the  other  factors  —  quan- 
tities of  goods  and  veh)city  of  circulation  —  afi'eet 
prices.  In  the  case  of  u  cliange  in  the  velocity 
of  circulation,  the  cliange  is  very  similar  to  that 
seen  in  the  ease  of  a  change  in  the  quantity  of  money. 
Thus  a  doubling  in  the  velocity  .jf  circulation  of 

39 


I 


!l 


WHY    IS  THE    DOLLAR   SHRINKINO?    [Ch.  III. 

money  will  double  the  level  of  prices,  provided  the 
quantity  of  money  in  circulation  and  the  quantities 
of  goods  exchanged  for  money  remain  as  before. 
The  equation  will  change  (from  its  original  form) 
to  the  following  :  — 

$5,000,000  X  40  =  200,000,000  loaves  X  $  .20  a  loaf 
+  10,000,000  tons  X  $10.00  a  ton 
+    30,000,000  yards   X  $  2.00  a  yard ; 

or  else  the  equation  will  assume  a  form  in  which 
some  of  the  prices  will  more  than  double,  and  others 
less  than  double  by  enough  to  preserve  the  same  total 
value  of  the  sales. 

Again,  a  doubling  in  the  quantities  of  goods  ex- 
changed will  cut  in  two  the  height  of  the  price  level, 
provided  the  quantity  of  money  and  its  velocity 
of  circulation  remain  the  same.  Tnder  these  cir- 
cumstances the  equation  will  change  (from  its  orig- 
inal form)  to :  — 

$5,000,000  X  20  =  400,000,000  loaves  X  $  .05  a  loaf 
+  20,000,{H)0  tons  X  2.50  a  ton 
+    60,000,(HK)  yards   X      .50  a  yard; 

or  else  it  will  assume  a  form  in  wliioh  some  of  the 
prices  are  more  than  halved,  and  others  less  than 
halved,  so  as  to  preserve  the  equation. 

Finally,  if  there  is  a  simultaneous  change  in  two 
or  all  of  the  three  influenies,  i.e.,  (luantity  of  money, 
velocity  of  circulaticm,  and  quantities  of  goods  ex- 
changed, the  price  level  will  be  a  compound  or  re- 
sultant of  these  various  influences.     If,  for  example, 

40 


^.-v,-.i.'  ^  — 


^■■. 


§  2.:  THE    EQUATION    OF   EXCHANGE 

the  quantity  of  money  is  doubled,  and  its  velocity 
of  circulation  is  halved,  while  the  quantity  of  floods 
exchanged  remains  constant,  the  price  level  will  be 
undisturbed.  Likewise,  it  will  be  undisturbed  if 
the  quantity  of  money  is  doubled  and  the  quantity 
of  goods  is  doubled,  while  the  velocity  of  circulation 
remains  the  same.  Todouhle  the  quanfity  of  money, 
therefore,  does  not  always  double  prices.  We  must 
distinctly  recognize  that  the  quantity  of  money  is 
only  one  of  three  factors,  all  equally  important  in 
determining  the  price  level. 

§  2.  Mechanical  Illustration 

Til  quation  of  exchange  has  now  been  expressed 
by  an  arithmetical  illustration.  It  may  be  repre- 
sented visually  1)\  a  mechanical  illustration.  This 
is  embodied  in  Figure  2,  which  represents  a  mechani- 
cal balance  in  equilibrium,  the  two  sides  of  which 
symbolize  respectively  the  money  side  and  the  goods 


Fio.  2 


side  of  the  equation  of  exchange.  The  weight  at 
the  left,  symbolized  by  a  j)urse,  represents  the 
money  in  circulation  ;  the  leverage  or  distance  from 
the  fulcrum  at  which  the  purse  is  hung  represents  the 

41 


I 


wf^^-wf'^^^^m^m^f^ki^mmmm^ 


WHY   IS  THE   DOLLAR  SHRINKING?    [Ch.  III. 

efficiency  of  this  money,  or  its  velocity  of  circulation. 
The  product  of  the  weight  by  its  leverage  is  exactly 
balanced  by  or  equal  to  corresponding  products  on 
the  opposite  side.  On  the  right  side  are  three 
weights,  representing  bread,  coal,  and  cloth,  and 
symbolized  respectively  by  a  loaf,  a  coal  scuttle, 
and  a  roll  of  cloth.  The  leverage,  or  distance  of 
each  from  the  fulcrum,  represents  its  price.  In 
order  that  the  leverages  at  the  right  may  not  be 
inordinately  long,  we  have  found  it  convenient 
to  reduce  the  unit  of  measure  of  coal  from  tons  to 
hundredweights,  and  that  of  cloth  from  yards  to 
feet,  and  consequently  to  enlarge  correspondingly 
the  number  of  units  (the  measure  of  coal  changing 
from  10,000,000  tons  to  200.000,000  hundred- 
weights, and  that  of  the  cloth  from  30,000,000  yards 
to  90,000,000  feet).  In  these  new  units  the  price  of 
coal  becomes  25  cents  per  hundredweight  (in  place 
of  $5.00  per  ton)  and  that  of  cloth  becomes  33^ 
cents  per  foot  (in  place  of  Sl.OO  per  yard). 

If  the  purse  at  the  left  becomes  heavier,  it  5' 
evident  that,  in  order  to  maintain  the  balance, 
some  of  the  weights  at  the  right  must  be  heavier 
also  or  must  be  moved  toward  the  right,  or  else  the 
purse  itself  must  be  moved  toward  the  right.  If, 
now,  we  assume  that  the  last  and  first  of  these  three 
changes  do  not  occur,  the  middle  one  nuist  occur. 
In  other  words,  if  the  position  of  the  purse  remains 
unaltered  {i.r.,  if  the  velocity  of  circulation  of 
money  does  not  change),  and  if  the  weights  at  the 

42 


^SSS'5'^^^^^!!^!!^^^^^^^^^'  t^v  ~''f 


^Sjli^^ 


5  2.)         THE   EQUATION   OF   EXCHANGE 


right  remain  unaltered  {i.e.,  if  the  volume  of  trade 
does  not  change),  then  some  or  all  of  these  weights 
must  move  to  the  right  {i.e.,  the  prices  of  goods 
must  increase).  If  these  prices  increase  uniformly, 
they  will  increase  in  the  same  ratio  as  the  increase 
in  money ;  if  they  do  not  Increase  uniformly,  some 
will  increase  more  and  some  less  than  this  ratio, 
maintaining  an  average.  Likewise,  it  is  evident 
that  if  the  velocity  of  circulation  of  money  increases, 
i.e.,  if  the  leverage  at  the  left  lengthens,  and  if  the 
money  in  circulation  (the  purse)  and  the  trade  (the 
various  weights  at  the  right)  remain  the  same, 
there  must  be  an  increase  in  prices  (lengthening  of 
the  leverages  at  the  right).  Again,  if  there  is  an 
increase  in  trade  (represented  by  an  increase  in 
weights  at  the  right),  and  if  the  velocity  of  money 
(left  leverage)  and  the  quantity  of  money  (left 
weight)  remain  the  same,  there  must  be  a  decrease 
in  prices  (right  leverages). 

In  general,  any  change  in  one  of  these  four  sets 
of  magnitudes  must  be  accompanied  by  such  a 
change  or  changes  in  one  or  more  of  the  other  three 
as  shall  maintain  equilibrium. 

As  we  are  interested  in  the  average  change  in 
prices  rather  than  in  the  prices  individually,  we 
may  simplify  this  mechanical  representation  by 
hanging  all  tiie  right-hand  wei.<.';hts  at  one  average 
point,  so  that  the  K-vorage  shall  represent  the  average 
of  prices.  This  average,  of  10  cents  per  loaf,  25 
cents  per  hundredweight,  and  3.3^  cents  per  foot, 

43 


im 


& 


.Ji?}*ri3Si'^; 


m. 


'-:.  f  >■-:<■!-. 


WHY    IS   THE    DOLLAR   SHRINKING?    [Ch   III. 


is  found  l>y  dividing  the  total  value  (10  cents  times 
201)  million  loaves,  plus  25  cents  times  2(M)  million 
huniredweight,  plus  33^  cents  times  <)()  million 
feet,  or  S100,000,0()())  by  the  total  immber  of  units 


TZ 


Fio.  3 


(200  million  plus  200  million  plus  90  million,  or 
490  million),  which  is  §100,000,000  ^  490  000,000, 
or  20.4  cents  i)er  unit.  This  leverage  is  a  so- 
called  "weigiited  average"  of  the  three  original 
leverages,  the  "weights"  being  literally  che  weights 
hanging  at  the  right. 

This  averaging  of  prices  is  represented  in  Figure 
3,  which  visualizes  the  fact  that  the  average  price 
of  goods  (right  leverage)  varies  directly  with  the 
quantity  of  money  (left  weight),  directly  witli  its 
velocity  of  circulation  (left  leverage),  and  inversely 
with  the  volume  of  trade  (right  weight). 

§  3.  Algebraic  Illustration 

To  put  these  relations  in  general  terms,  let 
M  stand  for  money  in  circulation, 
V,  its  velocity  of  circulation, 
p,  p',  /'".  etc.,  the  prices  of  various  goods, 
Q,  Q',  Q".  etc.,  the  (juuntities  of  those  goods  sold. 

44 


J  3]  THE    EQUATION    OF   EXCHANGE 


Then  we  may  write  tho  formula  as  follows  :  — 
Ml'  =  pQ 

+  p'Q' 
+  P"  Q" 

+  etc. 

MV  evidently  represents  the  amount  of  money  ex- 
pended for  goods  during  the  year.  On  the  other  side 
of  the  equation,  pQ,  p  Q',  and  so  on,  represent  the 
values  of  the  various  goods  bought.  If  in  this  equation 
M  is  doubled  (and  T  and  the  (?'s  remain  unchanged), 
then  the  /»'s  will,  on  the  average,  be  doubled;  if  ('  is 
doubled  (and  M  and  the  (?'s  are  unchanged),  the  //s 
will  be  doubled  also ;  while  if  the  (?'s  are  doubled  (and 
M  and  V  are  imchanged),  the  //s  will  be  halved. 

The  right  side  of  this  equation  is  the  sum  of  terms 
of  the  form  pQ,  a  price  multiplied  by  a  quantity 
bought.  It  is  customary  in  mathematics  to  abbreviate 
a  sum  of  terms  (all  of  which  are  of  the  same  form)  by 
using  "2"  as  a  prefix  to  pQ.  The  Greek  letter  "Z," 
called  "sigma,"  is  the  equivalent  of  the  English  letter 
"S,"  the  initial  letter  of  "sum,"  and  is  employed  as  a 
symbol  of  summation.  This  symbol  does  not  signify 
a  magnihtde  as  do  the  symbols  .1/,  V,  p,  Q,  etc.  It 
signifies  merely  the  operation  of  addition,  and  should 
be  read  "the  sum  of  terms  of  the  following  type." 
The  equation  of  exchange  may  therefore  be  written  :  — 

J/r  =  ^pQ. 

We  may,  if  we  wish,  further  simplify  the  right  side 
by  writing  it  in  the  form  FT,  where  P  is  an  average  of 
all  the  p's,  and  T  is  the  sum  of  all  the  (?'s.  T  then 
represents  in  one  magnitude  the  volume  of  trade  of  the 

45 


)• 


I 


i 

Ir-    il 


^      H 


WHY    IS  THP:    dollar   SHRINKING?    [Ch.  III. 


community.  The  e(|uation  thus  simplified  (3/F  =  PT) 
is  the  iilRohraif  int(>rprt'tatioJi  of  the  tni'chanical  illus- 
tration j,'ivcn  in  Figuri'  :},  where  all  the  goods,  instead 
of  being  hung  separately,  as  in  Figure  2,  are  combinerl 
and  hung  at  an  average  point  representing  their  aver- 
age price. 

§  4.  The  "  Quantity  Theory  of  Money  " 

To  recapitulate,  we  find  then  that,  under  the 
conditions  a.ssumed,  the  price  level  varies:  (1)  di- 
rectly as  the  quantity  of  money  in  circidation  {M) ; 

(2)  directly  as  the  velocity  of  its  circulation  (F) ; 

(3)  inversely  as  the  volume  of  trade  done  by  it  (T). 
The  first  of  these  three  relations  needs  special  em- 
phasis.    It   constitutes    the    "quantity    theory    of 

money." 

So  important  is  this  principle,  and  so  bitterly 
contested  has  it  been,  that  we  shall  illustrate  it 
further.  By  "the  quantity  of  money"  is  meant  the 
number  of  dollars  (or  other  given  mone+nry  units) 
in  circulation.  This  number  may  be  changed  in 
several  ways,  of  which  the  four  named  below  are 
most  important.  A  statement  of  these  four  will 
serve  to  picture  to  our  mind  the  meaning  of  the 
conclusions  we  have  reached  and  to  reveal  the  fun- 
damental peculiarity  of  money  on  which  they  rest. 

I.  As  a  first  illustration,  let  us  suppose  the  govern- 
ment to  double  the  denominatiotis  of  all  money  ;  that 
is,  let  u.^  suppose  that  what  has  been  hitherto  a  half 
dollar  is  henceforth  called  a  dollar,  and  that  what  has 

46 


I  4.1         THE    EQUATION   OF   EXCHANGE 

been  hitherto  a  dollar  is  henceforth  called  two  dol- 
lars. Evidently  the  number  of  "dollars"  in  cir- 
culation will  then  be  doubled ;  and  the  price  level, 
measured  in  terms  of  the  new  "dollars,"  will  be 
double  what  it  would  otherwise  Im.  Flvery  one  will 
pay  out  the  same  coins  as  if  no  such  law  were  passed. 
But  he  will,  in  each  case,  be  paying  twice  as  many 
"dollars."  For  example,  if  §3  formerly  had  to 
be  paid  for  a  pair  of  shoes,  the  price  of  this  same 
pair  of  shoes  will  now  become  SO.  The  number  of 
dollars  in  circulation  {M)  having  been  doubled  (its 
velocity  of  circulation  (F)  and  the  volume  of  trade 
{T)  remaining  the  same),  the  average  of  the  prices 
(P)  must  be  doubled. 

II.  For  a  second  illustration,  suppose  the  govern- 
ment cuts  each  dollar  in  two,  coining  the  halves 
into  new  "dollars";  and,  recalling  all  paper  notes, 
replaces  them  with  double  the  original  number  — 
two  new  notes  for  each  old  one  of  the  same  denomina- 
tion. In  short,  suppose  money  not  only  to  be  re- 
named, as  in  the  first  illustration,  but  also  reissued. 
Prices  in  the  debased  coinage  will  again  be  doubled 
just  as  in  the  first  illustration.  Wlierever  a  dollar 
had  been  paid  before  debasement,  two  dollars  — 
i.e.,  two  of  the  old  halves  coined  into  two  of  the  new 
dollars  —  will  now  be  paid  instead. 

In  the  first  illustration,  the  increase  in  quantity 
was  simply  nominal,  being  brought  about  by  re- 
naming coins.  In  the  second  illustration,  besides 
renaming,  the  further  fact  of  recoining  is  introduced. 

47 


'4  \ 


h 


I 


njp 


WHY    IS   THE    DOLLAR   SHRINKINCI  Z    (Ci.    HI. 


I  S( 


In  the  first  caso,  the  number  of  actual  pieces  of 
money  of  each  kind  was  unchanged,  but  tlicir  de- 
nominations were  doubk'd.  In  the  second  case, 
the  number  of  pieces  is  also  doubled  by  splittinji 
each  coin  and  remintinj?  it  into  two  coins,  each  of 
the  same  nominal  denomination  as  the  orisiual 
whole  of  which  it  is  the  half,  and  by  similarly  doub- 
ling the  paper  money. 

III.   For  a  third  illustration,  suppose  that,  in- 
stead of  doubling  the  number  of  dollars  by  splitting 
them  in  two  and  recoining  the  halves,  the  govern- 
ment (luplicatt's  each  piece  of  money  in  existence 
and  presents  the  duplicate  to  the  possessor  of  the 
original.     (We  must  in  this  case  suppose,  further, 
that  there  is  some  effectual  bar  to  prevent  the  melt- 
ing or  exporting  of  money.     Otherwise  the  quantity 
of  money  in  circulation  will  not  be  doubled ;   much 
of  the  increase  will  escape.)     If  the  quantity  of 
money  is  thus  doubled,  prices  will  also  be  doubled 
just  as  truly  as  in  the  second  illustration,  in  which 
there  were  exactly  the  same  number  of  coins  as 
now  under  consitleration  as  well  as  the  same  de- 
nominations.   The    only    difference    between    the 
second  and  the  third  ilhistrations  will  be  in  the  size 
and  weight  of  the  coins.     The  weights  of  the  indi- 
vidual coins,  instead  t»f  being  reduced,  will  remain 
unchanged  ;  but  their  number  will  be  doubled.     This 
doubling  of  coins  must  have  the  same  effect  as  the 
50  per  cent  debasement ;    that  is,  it  must  have  the 
effect  of  doubling  prices. 

48 


fMv 


\^^m^ 


IS? 


:^ff^-"-(^Jf.i'- 


'f-'V*^"'^^ 


m'-' 


5  4 1  THE    EgUATION    OF    EXCHANGE 


IV.   T\w  force  of  the  third  illustration  Incomes 
fvt'ii  more  evident,  if  (in  aeeordunee  with  the  pres- 
entation of  Ilicanlo)  we  pass  hack  by  means  of  a 
snV'niora^'e  from  the  third  illustration  to  the  second. 
'J'liat  is,  after  <ln[)li(atin<j  all  money,  let  the  jjovern- 
ment  subtract  half  of  each  coin,  thereby  reducing 
the  weight  to  that  of  the  debased  coinage  in  the 
second   illustration,  and  removing  the  only  point 
of  distinction  between  the  two.     This  "  seigniorage  " 
or  charge  for  coinage  made  by  the  sovereign  will  not 
affect  the  money  value  of  the  coins,  so  long  as  their 
viniibcr    remains    unchanged.     Prices    will    remain 
at  exactly  the  same  level  as  before  the  abstraction 
of  seigm'orage. 

Thus  to  double  the  quantity  of  money  will  double 
prices  in  whatever  way  the  doubling  may  be  brought 
about.  —  unless  there  should  occur  at  the  same 
time  some  change  in  the  velocity  of  circulation  of 
money  or  in  the  volume  of  trade. 

The  reader  may  ask  whether  some  change  in  the 
velocity  of  circulation  of  money  or  in  the  volume 
of  trade  will  not  necessarily  occur  as  a  direct  conse- 
quence of  the  increased  quantity  of  money.  The 
;  nswer  to  this  question  is  in  the  negative,  but  this 
answer  will  be  better  understood  after  we  have  seen 
on  what  causes  velocity  of  circulation  and  volume 
of  trade  depend.  In  the  present  chapter  we  are 
concerned  merely  to  show  that  an  increase  in  money 
will  necessitate  a  rise  in  prices  provided  the  velocity  of 
circulation  and  volume  of  trade  do  remain  the  sam.e. 
E  49 


I 

P ! 

I. 


I 

I 


t 
i 


1 


Il-i 


WHY    IS  THE   DOLLAR  SHRINKING?    [C.i.  III. 

There  are  many  historical  instances  of  raising 
I)rices  by  infliihiiK  the  curr<>ncy.  At  present,  Ar- 
gentina has  an  inflated  paper  eurreney,  and  prices 
in  paper  pesos  are  a  little  more  than  double  the 
prices  in  the  original  gold  pesos. 

The  quantity  theor> ,  theii,  asserts  that  (pro- 
\ided  velocity  of  circulation  and  volume  of  trade 
are  unchanged)  if  we  increase  the  number  of  dollars, 
whether  by  renaming  coins,  by  cutting  them  in 
two,  by  duplicating  them,  or  by  any  other  means, 
prices  will  be  increased  in  the  same  proportion.  It 
is  the  immber,  and  not  the  weight,  that  is  essential. 
As  long  as  the  number  of  dollars  remains  the  same 
each  dollar  will  have  the  same  purchasing  power  or 
value,  no  matter  what  the  weight  may  be.  This 
fact  needs  great  emphasis.  It  is  a  fact  which  differ- 
entiates money  from  all  other  goods  and  explains 
the  peculiar  manner  in  which  its  purchasing  power 
is  related  to  other  goods. 

In  the  case  of  sugar  or  any  other  ordinary  com- 
modity it  is  the  actual  iceight  and  not  the  number 
of  units  in  which  that  weight  is  expressed  which  is 
the  important  thing.  Thus  if  the  quantity  of  sugar 
in  a  community  is  changed  from  1,000,000  hun- 
dredweight to  1,000,000  pounds,  it  does  not  fol- 
low that  a  pound  will  have  the  value  in  exchange 
prexnously  possessed  by  a  hundredweight.  But  if 
the  money  in  circulation  is  changed  from  1,000,000 
units  of  one  weight  to  1,000,000  units  of  a  lighter 
weight,  the  value  of  the  new  and  lighter  coins  will 

50 


5  4)  TIIK    K(^LATION    OK    EX(^HAN0P: 

]yc  just  as  Rrcat  iis  was  the  vni.ie  of  the  old  and 
heavy  ones,  for  we  have  Men  from  the  equation  of 
exehaiif^e  that  their  purehasing  power  will  be  un- 
chanj;ed. 

The  quantity  thei.r>  uf  money  thus  rests,  ulti- 
mately, upon  th  fundamental  peculiarity  which 
money  alone  of  all  goods  possesses  —  the  fact  that 
it  has  no  definite  relation  to  the  satisfaction  of  human 
wants,  but  only  the  poirer  fo  pnrchase  things  wliieh 
do  have  sl  ,h  satisfying  power. 


1 


I 


I 

I 


51 


f 

i 


niAPTER   IV 


BANK    DEPOSITS   SURFKCT   TO    (HKCK 


i 

i 


§  1.  The  Mystery  of  Circulating  Credit 

We  are  now  ready  to  fxplaiii  the  nature  of  bank- 
deposit  currency,  or  circulating  (Tcdit.  Credit, 
in  the  sense  here  employed,  is  the  promise  of  one 
party  (called  the  debtor)  to  pay  money  to  anotiier 
party  (called  the  creditor).  Hank  deposits  subject 
to  check  are  the  claims  against  the  l)ank  of  a  speciid 
class  of  creditors  known  as  depositors,  by  virtue 
of  which  they  may,  on  demand,  draw  by  check 
specified  sums  of  money  from  the  bank.  Since  no 
other  kind  of  bank  deposits  will  be  cotisidered  by  us, 
we  shall  usually  refer  to  bank  deposits  subject  to 
check  simply  as  "bank  deposits."  They  are  also 
called  "circulating  credit." 

It  is  to  be  observed  that  not  the  checks  them- 
selves are  the  ultimate  currency  ;  but  the  bank  de- 
posits or  credit  balances  on  the  books  of  the  banks 
against  which  the  checks  arc  drawn.  As  has  been 
noted,  these  deposits  subject  to  check  are  not 
actually  money,  since  they  arc  not  generally  accept- 
able ;  they  always  require  the  special  consent  of  the 
payee.  But  they  are  cirrulating  media  because  such 
is  their  chief  purpose  and  use. 

52 


c^r 


in    RANK    DKPOSITS  SlIfUKrT   TO   ClIKrK 


1 


It  is  ill  comui  tioii  with  tli«>  traiistVr  of  Imiik  dt- 
posits  that  tluTf  arises  the  so-callnl  "  inystfry  «)f 
haiikiiiK'."  Many  |htsoiis  have  iniai;iiii'(|  that  cir- 
culating,' crc(ht  i>  a  siucial  t'oriii  of  wealth  which  may 
l)c  created  hy  the  hank  (»iit  (»!'  whole  cloth,  as  it 
were.  Others  have  iiiaiiitained  that  credit  has  no 
fouiidation  in  actual  wealth  at  all.  hut  is  a  kind  of  un- 
real and  intlated  hnlthle  with  a  precarious,  if  not 
wholly  illegitimate,  exi>teiice.  As  a  matter  of  fact, 
hankdeposits  are  as  easy  to  understand  as  hank-notos, 
and  what  is  said,  in  this  chapter,  of  hank  deimsits 
may  in  siihstance  he  taken  as  true  also  of  hank-notes. 
The  chief  dilfcrenci'  is  a  formal  one,  the  notes  cir- 
culating freely  from  hand  to  hand,  while  the  deposit 
currency  circulates  only  hy  means  of  specially  in- 
dorsed orders  called  "checks." 

To  understand  the  real  nature  of  hank  deposits, 
let  us  imagine  a  Ir  potiietical  iiistitutitm  —a  kind 
of  primitive  hank  existing  mainly  for  the  sake  of 
deposits  and  the  safe-keeping  of  actual  money. 
The  original  hank  of  Amsterdam  was  somewhat 
like  the  hank  ve  are  now  imagining.  In  such  a 
hank  a  iiumher  of  [leoplc  deposit  .'!>1(M),()<)()  in  gold, 
each  accepting  a  receipt  for  the  amount  of  his 
dei)osit.  If  this  bank  should  draw  up  a  "capital 
account"  or  statement,  it  would  show  SlOO.IMM)  in 
its  vaults  and  .SIOO.OOO  owed  to  depositers,  as 
follows :  — 

ASSKTS  LlAHIl.lTIF.S 

53 


H  '\ 


u 

'i 

s 


i'« 


;  1 


t 


i 


M 


•<-,  -  :■?; 


7T 


WHY   IS  THE    DOLLAR   SHRINKING?    [Cir.  IV. 

The  right-liaiul  side  of  tin-  stiiti-meiit  is,  of  course, 
made  up  of  smaller  amounts  owed  to  individuaJ 
depositors.  Assuming  that  there  is  owed  to  A 
SlO.OfM),  to  B  SID.IKM),  and  to  all  others  S8(),()00,  we 
may  write  the  bank  statement  as  follows :  — 

Assets  Liafhlities 

Gold    ....      $100,000     Due  depositor  A      .     $  10,000 

Due  depositor  B      .         10,000 

Due  other  depositors        80.(K)0 

"SUHMXX)  $T00.(M)0 

Now  assum'.'  that  A  wishes  to  pay  B  $1000. 
A  could  go  to  the  bank  with  B,  present  certificate's 
or  checks  for  SKXJO,  obtain  the  gold,  and  hand  it 
over  to  B,  who  might  then  redeposit  it  in  the  same 
bank,  merely  handing  it  back  through  the  cashier's 
window  and  taking  a  new  certificate  in  his  own 
name.  Instead,  however,  of  both  A  and  B  visiting 
the  bank  and  handling  the  money.  A  might  simply 
give  B  a  check  for  .SKMK).  B  would  then  send  the 
check  to  the  bank  and  the  bank  would  siini)ly  reduce 
A's  credit  on  its  books  by  SIOOO  and  increase  B's 
by  the  same  amount.  The  transfer  in  either  case 
would  mean  that  A's  holding  in  the  bank  was  re- 
duced from  .S10.(M)0  to  .SDOOO,  and  that  B's  was 
increased  from  S10,000  to  §11.000.  The  statement 
would  then  read  :  — 

ASSKTS  LlAIllLITIES 

(lold     ....     SKWXK)     Due  depositor  A 

Due  de))osit(>r  H 
Due  otlier  (lei)ositors 


SKMJ.OOO 


S  '.>,(XK) 
11. (MM) 
S(),(MM) 

S1()(),(H)0 


J4 


j  IJ    BA    K   DEPOSITS  SUBJECT  TO  CHECK 

Thus  the  certificates,  or  checks,  would  circulate 
in  place  of  money  among  the  various  depositors  in 
the  bank.  M'hat  really  changes  ownership,  or  "cir- 
culates," in  such  cases  is  the  " deposits,' '  i.e.,  the  right 
to  (haw  moymj.  The  check  is  merely  a  certain 
evidence  of  this  right  and  of  the  transfer  of  this  right 
from  one  person  to  another.  The  man  who  receives 
the  check  uses  it  Jis  evidence  of  a  right  to  draw  at 
the  hank  against  the  account  of  the  man  who  drew 
the  check. 

In  the  case  inider  considrration,  the  l)ank  would 
he  conducted  at  a  loss.     It  would  he  giving  the  time 
and  lalKiur  of  its  clerical  force  for  the  accommodation 
of  its  depositors,  without  getting  anything  in  return. 
But  such  a  hypothetical  hank  would  soon  find  — 
much   as  did   tlic   hank  of  Am.sterdam  —  that  it 
rnuld  make  profits  by  lending  at  interest  some  of 
the  gold   on   deposit.     This  could   not  ofVetid  the 
depositors,  for  they  do  not  expect  or  desire  to  get 
hack    the    identical    gold    they    deposited.     What 
they  want  is  simply  to  he  able  at  any  time  to  obtain 
the  same  amount  of  gold.     .Sjnee.  then,  their  arrange- 
ment with  the  bank  calls  for  the  payment  not  of 
any  particular  gold,  but  merely  of  a  definite  amount, 
and  that  but  oceasionally,  the  bank  finds  itself  free 
to  lend  out  part  of  the  gold  that  otherwise  would 
lie  idle  in  its  vai-lts.     To  keep  it  idle  would  be  a 
great  and  needless  wasti'  of  oi)j)ortunity. 

Let   US  suppose,  then,  that  the  bank  decides  to 
'"■•111  out  half  the  money  which  it  has  in  its  vaults. 

oo 


WHY   IS  THE   DOLLAR   SHRINKING?    [Cit.  IV. 

In  this  country  such  loaning  is  usually  done  in  ex- 
change for  "promissory  notes"  of  the  Iwrrowers. 
Now  the  loan  is  really  an  exchange  of  the  money 
for  the  promissory  note.  lA>t  us  suppose  that  the 
borrowers  actually  draw  out  SaO.OCK)  of  gold.  The 
bank  thereby  exchanges  this  money  for  promissory 
notes,  and  its  books  will  read  :  — 

Assets  LiAniLiTiEs 

Gold     ....     $  ')0,000     Duo  depositor  A  $    9,000 

Promissory  notes        .")0,(KM)     Due  <lei)()sitor  B  11,000 

Due  other  depositors         SO.OfM) 
SUK).(KH)  .S1(X).(KK) 

It  will  be  noted  that  now  the  gold  in  the  bank  is  only 
S.j(),()()(),  while  the  total  d(>posits  are  still  .S1(M),(M)(). 
In  other  words,  the  depositors  now  have  more 
"  money  on  deposit"  than  the  bank  has  in  its  vaults  ! 
But,  as  will  be  s'  ')wn,  this  form  of  expression  in- 
volves a  popular  fallacy,  in  the  misuse  of  the  word 
"money."  Something  of  equivalent  value  is  be- 
hind each  loan,  but  not  necessarily  money. 

Next,  suppose  the  horronrrs  become,  in  a  sense, 
lenders  also,  by  redepositing  the  .S')(K(M)(»  of  money 
which  thi-y  borrowed,  //(  rrltiru  for  the  right  to  drum 
out  the  mnie  .sum  on  dniiand,  j)rcf(Tring  to  use  tlw 
saTne  in  making  payments  by  check  rather  than  by 
money.  In  other  words,  suppose  that  after  borrowing 
Sr)(),()(K)  from  the  bank  they  lend  it  back  to  the  bank. 
The  bank's  assets  will  thus  be  enlarged  by  S.")0,()(M 
and  its  obligations  (or  credit  extended)  will  bcecpially 
enlarged;  and  the  balance-sheet  will  become:    - 

o() 


{  1.]    BANK   DEPOSITS   SUBJECT   TO   CHECK 

Assets  Liabiuties 

Ciold     ....     $100,000     Duo  depositor  .\        .  S    9.000 

Promissory  notes       o0,(KX)     I  )ii(>  depositor  B        .  11  ,(X)0 

Due  other  depositors  cS(»,(KK) 
Due     new     (lepositors, 

i.e.,  the  borrowers  .lO.OOO 

Umm)  Sl.-)0,000 

In  this  ease  gold  was  horrowed  in  (exchange  for 
a  promissory  note  and  then  handed  hack  in  exchange 
for  a  right  to  draw.  Thus  the  gold  really  did  not 
budge ;  hut  the  bank  received  a  i)r()niiss()ry  Tiote 
and  the  depositor  a  right  to  draw.  Evidently, 
therefore,  the  same  result  would  have  followed  if 
each  borrower  had  merely  handed  in  his  promissory 
note  and  received  in  exchange  a  right  to  draw.  As 
this  operation  is  most  frequently  puzzling  to  the 
iniinitiated,  we  repeat  the  tables  representing  the 
conditions  before  and  after  these  "loans,"  i.e.,  these 
exchanges  of  promissory  notes  for  rights  to  draw. 


Gold 


BKFORl':  TlIK   L().\XS 

Assets  biAitii.iTiEs 

.     .     .     SKKI.OOO     Due  depositors     .     .     ?100,000 


AITKU  Tin:   l.OANS 

.\SSETS  •  I.IAIUI.ITU'S 

Gold     ....     SIOO.OOO     Due  (lepositors     .     .     S1.')0,(KX) 
IViiiiiissory  notes       5(),(KM) 

Clearly,  therefore,  th  intermediation  of  the 
money  in  this  case  is  needless  complication,  tliough 
it  may  help  to  a  theoretical  understanding  of  the 

o7 


I 

} 


1 ;' 


WHY    IS   THE    DOLLAR   SHRINKING  ?    [Ch.  IV. 

resultant  shifting  of  rif^hts  and  liabilities.  Thus 
the  bank  may  receive  deposits  of  gold  or  deposits 
of  promises  to  pay.  In  exchange  f<tr  these  promises 
it  may  give,  or  lend,  either  a  right  to  draw  or  gold. 
Even  when  the  borrower  has  "tleposited"  only  a 
promise  to  pa\-  money,  by  fiction  he  is  still  held  to 
have  deposited  raone\- ;  and,  like  the  original  de- 
positor of  actual  money,  he  is  given  the  right  to 
make  out  checks  to  draw  out  money.  The  total 
value  of  rights  to  draw,  in  whichc\'er  way  arising, 
is  termed  "  deposits."  Banks  more  often  lend  rights 
to  draw  than  actual  money,  partly  because  of  the 
greater  convenience  to  borrowers  and  i)artly  be- 
cause the  banks  wish  to  keep  their  actual  money 
on  hand,  or  "ca^h  reserves,"  large,  in  order  to  meet 
large  and  unexpected  demands.  It  is  true  that  if  a 
bank  loans  money,  part  of  the  money  so  loaned 
will  bf  redei)osited  by  the  persons  to  whom  the 
borrowers  i)ay  it  in  the  course  of  business;  but  it 
will  not  necessarily  be  redeposited  in  the  same  bank. 
Hence  tlie  average  banker  prefers  that  the  borrower 
should  not  withdraw  actual  money. 

Besith's  lending  (lep(»>it  rights,  l)anks  may  also  lend 
their  own  notes,  calhd  "bank-notes."  And  the  prin- 
ciple governing  bank-notes  is  the  same  as  the  principle 
governing  depusit  rigiits.  The  holder  simply  gets 
a  pocketful  of  bank-notes  instead  of  a  ereilit  on  his 
bank  account.  The  bank  must  always  be  ready  to 
pay,  on  demand,  either  the  note  holders  —  i.f.,  to 
"redeem    its   notes"— or   the   dejwsitors,    and    in 


§  2]    BANK   DP:P0SITS  SUBJECT   TO  CHECK 

cither  case  the  hank  exchanges  a  promise  for  a 
promise.  In  the  case  of  the  note,  the  bank  has 
exchanged  its  bank-note  for  a  customer's  promissory 
note.  The  bank-note  carries  no  interest,  is  payable 
on  demand,  and  is  issued  by  an  institution  well 
known  and  trusted.  The  customer's  note  bears 
interest,  is  usually  payable  at  a  definite  date,  and 
issued  .simply  by  an  individual. 

Assuming  that  the  bank  issues  .S50.0(K)  of  bank- 
notes, the  balance-sheet  will  now  become  :  — 

ASSKTS  LlAIilLITIES 

fJ«'W    ....   sinn.non   Ducdopositors    .    .   $ir.(),ooo 

Loans  (promissory  Due  bank-note  holders     .')0,000 

notes)    .     .     .       1()0.(X)0 

S-^U«.0(X)  $200,000 

§  2.  The  Basis  of  Circulating  Credit 

We  repeat  that  by  means  of  credit  the  deposits 
and  notes  of  a  bank  may  exceed  its  cash.  There 
would  be  nothing  mysterious  or  obscure  about  this 
fact  if  people  couid  be  induced  not  to  think  of  bank- 
ing opcTations  as  money  operations.  To  so  repre- 
M-nt  them  is  nietai)liorical  and  misleading.  They 
are  no  more  money  operations  than  they  ar<;  real- 
estate  transactions.  A  bank  depositor.  A,  has  not 
ordinarily  "deposited  money";  and  whether  he 
Ikis  or  not,  he  certainly  cannot  properly  say  that  he 
"lias  money  in  the  bank."  What  he  does  have  is 
the  bank's  promise  to  i)ay  money  on  demand.  The 
bank  owes  him   money.     When  a   private  person 

59 


^ 


^      II 


WHY    IS  THE    DOLLAR   SHRINKING?    [Ch.  IV. 

owes  moiu'v,  the  creditor  never  thinks  of  saying 
tliat  he  has  it  on  (h'posit  in  tlie  debtor's  pocket. 

The  same  principles  of  jiroperty  wliich  apply 
to  bank  deposits  also  apply  to  bank-notes.  There 
is  wealth  somewhere  Ix'hind  the  nnitual  promises, 
thongh  in  difTerent  degrees  of  accessibility.  The 
note  holder's  promise  (his  promissory  note)  is  se- 
cured by  his  assets;  and  the  bank's  promise  (the 
bank-note)  is  secured  by  the  bank's  assets.  The 
note  holder  has  "swapped"  less-known  credit  for 
better-known  credit. 

If  this  fact  is  borne  in  mind,  the  reader  will  be 
abli-  to  conquer  the  doubt  which  may  already  have 
arisen  in  his  mind  —  the  doubt  as  to  the  legitimacy 
of  the  bank's  procedure  in  "lending  some  of  its 
depositor's  money."  It  cannot  be  too  strongly 
emphasizt-d  that,  in  any  balanci'-sheet,  the  value 
of  the  liabilities  rests  on  that  of  the  assets.  The 
deposits  of  a  bank  are  no  exceptions.  We  must  not 
be  misled  by  the  fact  that  the  ra.sh  assets  may  be 
less  than  the  deposits.  When  the  uninitiated  first 
learn  that  the  number  of  dollars  which  note  holders 
and  deiM>sitors  have  the  right  to  draw  out  of  a  bank 
exceeds  the  luiniluT  of  dolla^^  in  the  bank,  they  are 
apt  to  junjp  to  the  conclusion  that  there  is  nothing 
beliintl  the  notes  or  deposit  liabilities.  Yet  behind 
these  obligations  ther(>  is  always,  in  the  case  of 
a  solvent  bank,  full  \alue  -if  not  actual  dollars,  at 
any  rate,  dolhirs'  imrlli  <;/'  imipirfi/.  By  no  jug- 
glery can  the  liabilities  exceed  the  assets  except  in 

tiO 


S  2]    BANK    DEPOSITS  SUBJKCT   TO   CHECK 


insolvency,  and  even  in  that  case  only  nominally, 
for  it  still  holds  that  the  true  value  of  the  liabilities 
will  be  only  what  can  be  paid  on  them  —  perhaps 
only  2-)  cents  on  the  dollar.     This  true  value  of  the 
liabilities  will  rest  upon  and  be  equal  to  the  true 
value  of  the  assets  behind  them  by  means  of  which 
they  will  be  paid,  so  far  as  may  be.     Debts  which 
cannot  or  will  not  be  paid  in  full  are  often  called 
"bad  debts";  and  the  value  of  "bad  debts"  is  not 
their  face  value,  but  their  actual  value  to  the  creditor. 
These  assets,  as  already  indicated,  are,  and  ought 
to  be,  largely  the  notes  of  merchants,  although  so 
far  as  the  principles  here  discussed  are  concerned, 
they   might   be   any   property  whatever.     If  they 
consisted  in  the  ownership  of  real  estate  or  wealth 
unencumbered,  so  that  the  tangible  wealth  which 
property  always  reprt-sents  were  clearly  evident,  all 
mystery   would   disappear.     But  the  effect   would 
not  be  different.     Instead  of  taking  grain,  machines, 
or  steel  ingots  on  deposit,  in  exchange  for  the  sums 
lent,  banks  prefer  to  take  interest-bearing  notes  of 
corporations  and  individuals  who  own,  directly  or 
indirectly,  grain,  machines,  and  steel  ingots;   and 
by  the  banking  laws  the  banks  are  even  compcUcd 
to  take  the  notes  instead  of  the  ingots.     The  bank 
finds  itself  with   liabilities  which    exceed    it-  r(,.'<h 
iissets ;  but  this  excess  of  liabilities  is  balanced  by  the 
possession  of  other  assets  than  cash.     Thoc  other 
■issets  of  the  bank  are  the  liabilities  of  business  men. 
1  liese  liabilities  are  in  turn  supported  b\  the  assets 

61 


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WHY    IS  THK   DOLLAlt   SHRINKING?    [Cii.  IV. 

of  the  business  men.  If  we  continue  to  follow  up 
the  chain  of  Habilities  and  assets,  we  shall  find  the 
ultimate  basis  of  the  bank's  liabilities  in  the  concrete 
tangible  wealth  of  the  world. 

This  ultimate  basis  of  the  entire  credit  structure 
is  kept  out  of  si^ht,  but  the  basis  exists.     Indeed,  we 
may  say  that  banking,  in  a  sense,  causes  this  concrete, 
tangible  wealth  to  circulate.     Even  though  the  acres 
of  a  landowner  or  the  iron  stoves  of  a  stove  dealer 
cannot  circulate  in  literally  the  same  way  that  gold 
dollars  circulate,  yet  the  landowner  or  stove  dealer 
may  give  to  the  bank  a  note  on  which  the  banker 
may  base  bank-notes  or  deposits;   and  these  bank- 
notes and  deposits  will  circulate  like  gold  dollars. 
Through  banking,  he  who  possesses  wealth  difficult 
to  exchange  can  create  a  circulating  medium  based 
upon  that  wealth.     He  has  only  to  give  his  note,  for 
which,  of  course,  his  property  is  liable,  get  in  return 
the  right  to  draw,  and  lo !  his  comparatively  unex- 
changeable wealth  becomes  liquid  currency.     To  put 
it  crudelv,  deposit  banking  is  a  device  for  coining 
into  dollars,  land,  stoves,  and  other  wealth  not  other- 
wise generally  exchangeable. 

We  began  bv  regarding  a  bank  as  substantially  a 
cooperative  enterprise,  operated  for  the  convenience 
and  at  the  exp«  use  of  its  depositors.  But  as  soon 
as  the  bank  reucher.  the  point  of  lending  money  to 
X.  Y.  and  Z  on  time,  while  itself  owing  money  on 
demand,  it  assumes  toward  X.  Y,  and  Z  risks  which 
the  depo-tor:i  would  be  unwilling  to  assume.     1<^ 

62 


f  3.1    BANK   DEPOSITS  SUBJECT   TO   CHECK 


meet  this  situation,  the  responsibility  u\h\  expense 
of  running  the  bunk  are  taken  by  a  third  class  of 
people  —  stoekholders  —  who  are  willing  to  assume 
the  risk  for  the  sake  of  tht-  chance  of  profit.  Stock- 
holders, in  order  to  guarantee  the  depositors  against 
loss,  put  in  some  cash  of  their  own.  The  object  is 
to  make  good  any  loss  to  depositors,  while  reserving 
the  right  to  keep  the  profits  earned  by  loaning  at 
interest.  Let  us  suppose  that  the  stockholders 
put  in  SoO.OOO,  viz.  S40,0v)()  in  gold  and  S1(),(M)()  in 
the  purchase  of  a  bank  building.  The  accounts 
now  stand :  — 


Assets 


Liahilities 


Gold 


?140,(XX)     Due  depositors 


Loans  ....       100,(K)0 
Building   .     .     . 


Due  note  holders 
lO.OOO    Due  stockholders 
i25(),00() 


$1,50,000 
50,000 
■')0,(K)0 

Si':)0,()()o 

The  accounts  as  they  now  stand  include  the  chief 
features  of  an  ordinary  modern  bank — a  so-called 
"bank  of  deposit,  issue,  and  discount." 

§  3.  Banking  Limitations 

We  have  seen  that  there  are  assets  to  meet  the 
liabilities.  We  now  should  note  that  the /or /«  of  the 
assets  must  be  such  as  will  insure  meeting  the  lia- 
bilities promptly.  Since  the  business  of  a  bank  is 
to  furnish  easily  exchangeable  property  (cash  or 
credit)  in  place  of  the  "slower'"  property  of  its 
depositors,  it  fails  of  its  purpose  when  it  is  caught 
with  insufficient  cash,  by  which  is  meant  money. 

63 


I 


^  'I 


WHY    IS  THE    DOLLAR   SHHfNKINd?    (Ch.  IV. 


Yet  it  makes  profits  partly  by  tyiiin  up  its  quick 
l)ropfrty,  i.e.,  Icudiiin  it  out  in  quiirters  wluTe  it  is 
less  lueessible.  Its  prohk«in  in  policy  is  to  tie  up 
enough  to  uicreasc  its  earning,  hut  not  to  tie  up  so 
much  as  to  ^et  tied  up  itself.  So  far  as  anything 
has  yet  been  said  to  the  c(.ntrary.  a  bank  mifiht 
increase  indefinitely  its  loans  in  relation  to  its  cash 
or  in  relation  to  its  capital.  If  this  were  so,  deposit 
currency  could  be  indefinitely  inflated. 

There  are.  however,  hmits  to  such  expansion  of 
loans  imposefl   by    prudenc-e   and   sound   economic 
policy.     Insolvency  and  insufficiency  of  cash  must 
both    be    avoided.     Insolvency    is    that    condition 
which  threatens  when  Habilities  are  extended  with 
insufficient   capital.     Insufficiency   oi  cash   is  that 
condition  which  threatens  when  liabilities  are  ex- 
tended   unduly  relatively  to   cash.      Insolvency  is 
reached  when  the  assets  no  longer  con  <r  the  liabdi- 
ties    (to   others   than    stockhoklers).    so    that    the 
bank  is  unable  to  i)ay  its  debts.     Insufficiency  of 
cash   is  reached   when,   although   the  bank's  total 
assets  may  be  fully  equal  to  its  liabilities,  the  actual 
cash  on  hand  is  insufficient  to  meet  the  needs  (.f 
the  instant,  and  the  bank  is  unable  to  pay  its  debts 

OH  (lciiian(l. 

The  risk  uf  insolvency  is  the  greater,  the  less  the 
ratio  of  the  stockholders'  interest  to  all  liabilities 
to  others.  The  risk  of  insufficiency  of  cash  is  the 
greater,  tlu'  less  the  ratio  of  the  cash  to  the  demand 
liabilities.     In  other  words,  the  leading  safeguard 

64 


I  3]    BANK    DKPOSITS  SUIUKCT   TO  CHKCK 

against  insolvency  lies  in  a  larKe  capital  and  surplus, 
but  the  leadinn  siifejinanl  aKainst  insnfficienc\  of 
cash  lies  in  a  hirj^c  cash  reserve.  Insolvency  proper 
may  befall  any  business  enterprise.  Insufficiency 
of  cash  relates  especially  to  banks  in  their  function 
of  redeeming  notes  and  deposits. 

Let  us   illustrate  insufficiency  of  cash.     In   our 
bank's  accounts  as  we  left   them  there  appeared 
cash  to  the  extent  of  S14(>,(MKI  and  Sl'IMI.OiM)  of  de- 
mand liabilities  (deposits  and  notes).     The  managers 
of  the  bank  may  think  this  fund  of  .S14(K(KM)  un- 
necessarily large  or  the  loans  umiecessarily  small. 
They  may  then  increase  their  loans  (extended  to 
customers  partly  in  the  form  of  cash  and  partly 
in  the  form  of  deposit  accounts)  mitil  the  cash  held 
by  the  bank  is  reduced,  say  to  S4(),(KK).  and  the 
liabilities  due  dei)ositors  and  note  holders  increased 
to  S3(K),(KK).     If,  under  these  circumstances,  some 
depositor   or   note   holder   demands   SoO.iMK)   cash, 
immediate  payment  will  be  impossible.     It  is  true 
that  the  assets  still  etpial  the  liabilities.     There  is 
full  value  iH'hind  the  S:)().0(M)  demanded;    but  the 
understandinj;  was  that  depositors  and  note  holders 
should  Ih'  paid  in  uioiiri/  on  demand.     Were  this  not 
a  stipulation  of  the  deposit  contract,  the  bank  might 
pay  the  claims  thus  made  ui)on  it  by  transferring 
to  its  creditors  the  promissory  notes  due  it  from  its 
debtors  ;  or  it  might  ask  the  customers  to  wait  until 
it  could  turn  these  securities  into  cash. 
Since  a  bank  cannot  follow  either  of  these  plans, 
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WHY   IS  THE   DOLLAR  SHRINKING?    (Ch.  IV. 


it  tries,  where  insufficlt  i  cy  of  cash  impends,  to  fore- 
stall this  condition  by  "  calling  in  "  some  of  its  loans, 
or  if  none  can  be  called  in,  by  selling  some  of  its 
securities  or  other  property  for  cash.    But  it  happens, 
unfortunately,  that  there  is  a  limit  to  the  amount 
of  cash  which  a  bank  can  suddenly  realize.     No  bank 
could  escape  failure  if  a  large  percentage  of  its  note 
holders  and   depositors  should   simultaneously  de- 
mand cash  payment.    The  paradox  of  a  run  on  a 
bank  is  well  expressed  by  the  case  of  the  man  who 
inquired  of  his  bank  whether  it  had  cash  available 
for  paying  the  amount  of  his  deposit,  saying,  "If 
you  can  give  me  the  money,  I  don't  want  it ;   but 
if  you  can't,  I  do."     Such  was  the  situation  in  1907 
in  Wall  Street.      All  the  depositors  at  one  time 
wanted  to  be  sure  their  money  "was  there."     Yet 
it  never  is  there  all  at  one  time. 

Since,  then,  insufficiency  of  cash  is  so  troublesome 
a  condition  —  so  difficult  to  escape  when  it  has 
arrived,  and  so  difficult  to  forestall  when  it  begins 
to  approach  —  a  bank  must  so  regulate  its  loans 
and  note  issues  as  to  keep  on  hand  a  sufficient  cash 
reserve,  and  thus  prevent  insufficiency  of  cash  from 
even  threatening.  It  can  regulate  the  reserve  in 
various  ways.  For  instance,  it  can  increase  its 
reserve  relatively  to  its  liabilities  by  "discounting" 
less  freely  —  by  raising  the  rate  of  discount  and  thus 
discouraging  would-be  borrowers,  by  outright  re- 
fusal to  lend  or  even  renew  old  loans,  or  by  "call- 
ing in"  loans  subject  to  call.     Reversely,  it  can 

66 


rsS',* 


§  3.]    BANK   DEPOSITS  SUBJECT   TO   CHECK 

decrease  its  reserve  relatively  to  its  liabilities  by 
discountn,,^  more  freely  -  by  lowerir.g  the  rate  of 
discount  and  thus  attracting  borrowers.     The  more 
the  loans  m  proportion  to  the  cash  on  hand,  the 
greater  the  profits,  but  the  greater  the  danger  also. 
In  the  long  run  a  bank  maintains  its  necessary  re- 
ser.^  by  means  of  adjusting  the  interest  rate  charged 
for  loans.     If  ,t  has  few  loans,  and  a  reserve  large 
enough  to  support  loans  of  much  greater  volume,  it 
will  endeavour  to  extend  its  loans  by  lowering  the 
rate  of  mterest.     If  its  loans  arc  large,  and  it  fears 
too  great  demands  on  the  reserve,  it  will  restrict 
the  loans  by  a  high  interest  charge.     Thus  bv  al- 
ternately  raising  and  lowering  the  rate  of  interest 
a  bank  keeps  its  loans  within  the  sum  which  the  re- 
serve can  support,  but  endeavours  to  keep  them  (for 
the  sake  of  profit)  as  high  as  the  reserve  will  support. 
If  the  sums  owed  to  individual  depositors  are  large 
relatively  to  the  total  liabilities,  the  reserve  shoiUd 
l>e  proportionately  large,  since  the  action  of  a  small 
number  of  depositors  can  deplete  it  rapidlv     The 
reserve  in  a  large  city  of  great  banking  acti^-ity 
needs  to  be  greater  in   proportion  to  its  demand 
liabilities  than   m   a   small   town    with   infrequent 
'•anking  transactions.     Xo  absolute  numerical  rule 
can  oe  given,  though  arbitrary  rules  are  often  im- 
posed by  law.     Banks  in  the  United  States,  are 
required  to  keep  a  ratio  of  reserve  to  deposits,  varv- 
'"«  from  12.]  per  cent  to  2o  per  cent,  according  as 
tl'ey  are   state   or   national   banks,  and   according 

67 


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wmi^mii^i^sf^F^.i'^s^^i^m^sr:^ 


'     V- 


WHY   IS   THE    DOLLAR    SHRINKING?    [Ch.  IV. 

to  their  location.  The  proposed  National  Reserve 
banks,  which  are  to  be  purely  bankers'  banks,  are 
to  keep  a  still  higher  ratio.  For  the  whole 
country  the  reserves  in  banks  are  about  one-fifth 
of  the  deposits.  These  reserves  are  all  in  de- 
fence of  deposits.  In  defence  of  bank-notes,  which 
are  issued  only  by  national  banks,  the  method  of 
protection  is  different.  True,  the  same  economic 
principles  pply  to  both  bank-notes  and  deposits, 
but  the  law  treats  them  differently.  The  gov- 
ernment itself  chooses  to  undertake  to  redeem  the 
national  bank-notes  on  demand,  imposing  on  the 
banks  certain  obligations  to  deposit  with  itself 
a  redemption  fund  and  government  bonds.  The 
same  principle  is  to  be  extended  to  the  new  reserve 

notes. 

As  pre\-iously  stated,  the  cash  reserves  of  banks, 
though  money,  are  not,  properly  speaking,  money 
in  circulation.  The  reason  is  that  they  are  not  held 
for  the  purchase  of  goods,  but  the  redemption  of 
another  kind  of  currency  —  deposits.  Thus  the 
money  in  any  society  is  divided  into  two  chief  parts : 
money  in  circulation  and  money  in  banks.  In 
the  United  States  these  two  are  approximately  equal, 
both  being  about  one  and  a  half  billion  dollars.^ 


»  In  the  United  States  there  is  a  third,  though  smaller, 
stock  of  money,  the  hoard  in  the  United  States  Treasury, 
amounting  at  present  to  about  a  third  of  a  billion  of  dollars. 
In  other  countries  the  government  money  is  usually  almost 
all  deposited  in  banks. 

68 


$4.]    BANK   DEPOSITS   SUBJECT   TO   CHECK 


§  4.   The  Total  Currency  and  its  Circulation 

The  study  of  banking  operations,  then,  discloses 
two  species  of  bank  curreiun' :  one,  bank-notes,  be- 
longing to  the  category  „f  money ;  and  the  other, 
deposits,  belonging  outside  of  that  category  but 
constituting  an  excellent  substitute.  Referring  these 
to  the  larger  category  "  goods,"  we  have  a  threefold 
classification  of  goods:  first,  actual  monen;  second, 
rights  to  draw  money  (deposits) ;  and."  third,  all 
other  goods.  Among  these,  then,  there  are  six 
possible  types  of  exchange :  — 

(1)  Money  against  money. 

(2)  Deposits  against  deposits. 

(3)  Goods  against  goods. 

(4)  Money  against  deposits. 

(5)  Money  against  goods. 

(6)  Deposits  against  goods. 

For  our  purpose,  only  the  last  two  types  of  exchange 
are  important,  for  these  constitute  the  circulation 
of  circulating  media.  As  regards  the  other  four,  the 
first  and  third  are  "money  changing"  and  "barter," 
respectively.  The  second  and  fourth  are  banking 
transactions,  the  second  being  such  operations  as 
the  selling  of  drafts  for  checks  or  the  mutual  can- 
cellation of  bank  clearings,  and  the  fourth  being 
such  operations  as  the  depositing  or  withdrawal 
of  money,  by  depositing  cash  or  cashing  checks. 

The  analysis  of  the  balance-sheets  has  prepared 
us  for  the  inclusion  of  bank  deposits  or  circulating 

G9 


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t  m 


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W 


:ll| 


WHY   IS  THE   DOLLAR   SHRINKING!  ?    [Ch.  IV. 

credit  in  the  equation  of  exchange.  We  shall 
still  use  M  to  express  the  qiuintity  of  actual  raoney 
and  V  to  express  the  velocity  of  its  circulation. 
Similarly,  we  shall  now  use  M'  to  express  the  total 
deposits  subject  to  transfer  by  check,  and  V  to 
express  the  average  velocity  of  their  circulation. 
The  total  value  of  purchases  in  a  year  is  nt)  longer 
to  be  measured  by  MV,  but  by  MV  +  M'V.  The 
equation  of  exchange,  therefore,  becomes :  — 

j/r  + j/'r  =  ::pQ=  pt. 

Let  us  again  represent  the  equation  of  exchange 
by  means  of  a  mechanical  picture.  In  Figure  4, 
trade,  as  before,  is  represented  on  the  right  by  the 
weight   of   a   miscellaneous   assortment  of   goods; 


Fig.  4 


and  their  average  price  by  the  distance  to  the  right 
from  the  fulcrum  or  the  leverage  at  which  this  weight 
hangs.  Again,  at  the  left,  money  (M)  is  represented 
by  a  w^eight  in  the  form  of  a  purse,  and  its  velocity 
of  circulation  (T)  by  its  leverage  ;  but  now  we  have 
a  new  weight  at  the  left,  in  the  form  of  a  bank-book, 
to  represent  the  bank  deposits  {M').  The  velocity 
of  circulation  (V)  of  these  bank  deposits  is  repre- 
sented by  its  distance  from  the  fulcrum  or  the  lever- 
age at  which  the  book  hangs. 

70 


§  6]    BANK    DEPOSITS  SUBJECT   TO  CHECK 

This  mechanism  makes  clear  the  fact  that  the  aver- 
age price  (right  leverage)  increases  with  the  increase 
of  money  or  bank  deposits  and  with  the  velocities  of 
their  circulation,  and  decreases  with  the  increase  in 
the  volume  of  trade. 

Recurring  to  the  left  side  of  the  equation  of  ex- 
change, or  Ml'  +  M'l',  we  see  that  in  a  community 
without  bank  deposits  the  left  side  of  the  equation 
reduces  simply  to  MV,  the  formula  of  the  preceding 
chapter,  for  in  such  a  community  the  term  M'V 
vanishes.  The  introduction  of  J/'  tends  to  raise 
prices ;  that  is,  the  hanging  of  the  bank-book  on  the 
left  requires  a  lengthening  of  the  leverage  at  the  right. 

§  6.  Deposit  Currency  Normally  Proportional  to 

Money 

With  the  extension  of  tlie  equation  of  monetary 
circulation  to  include  deposit  circulation,  the  influ- 
ence exerted  by  the  quantity  of  money  on  general 
prices  becomes  less  direct ;  and  the  process  of  trac- 
ing this  influence  becomes  more  difficult  and  compli- 
cated. It  has  even  been  argued  that  this  interposi- 
tion of  circulating  credit  breaks  whatever  connection 
there  might  be  between  prices  and  the.  quantity  of 
money.  This  would  be  true  if  circulating  credit 
were  independent  of  money.  But  the  fact  is  that 
the  quantity  of  circulating  credit.  J/',  tends  to  hold 
a  definite  relation  to  }f,  the  quantity  of  money  in 
circulation  ;  that  is,  deposits  are  normally  a  more  or 
less  definite  multiple  of  money. 

71 


•■1'  I 


J 


WHY    IS   THK    DOLLAR   SHRINKINO?    [Ch.  IV. 


I 


:: 


Two  facts  normally  give  deposits  a  more  or  less 
definite  ratio  to  money.     The  first  has  been  already 
explained,  viz.,  that  bank  reserves  are  kept  in  a  more 
or  less  definite  ratio  to  bank  deposits.     The  second 
is  that  individuals,  firms,  and  corporations  preserve 
more  or  less  definite  ratios  between  their  cash  trans- 
actions and  their  check  transactions,  and  also  be- 
tween their  money  and  deposit  balances.     These 
ratios   are   determined    by    motives   of    individual 
convenience  and  habit.     In  general,  business  firms 
use  money  for  wage  payments,  and  for  small  mis- 
cellaneous  transactions   included    under   the   term 
"petty   cash";   while    for   settlements   with   each 
other  they   usually   prefer   checks.     These   prefer- 
ences are  so  strong  that  we  could  not  imagine  them 
overriden  except  temporarily,  and  to  a  small  degree. 
A  business  firm  would  hardly  pay  car  fares  with 
checks  and  liquidate  its  large  liabilities  with  cash. 
Each  person  strikes  an  equilibrium  between  his  use 
of  the  two  methods  of  payment  and  does  not  greatly 
disturb  it  except  for  short  periods  of  time.     He  keeps 
his  stock  of  money  or  his  bank  balance  in  constant 
adjustment  to  the  payments  he  makes  in  money 
or  by  check.     Whenever  his  stock  of  money  becomes 
relatively   small   and   his   b:  i'     balance   relatively 
large,  he  cashes  a  check.     J     itie  opposite  event,  he 
deposits  cash.     In  this  wa     he  is  constantly  con- 
verting one  of  the  two  media  of  exchange  into  the 
other.     A  private  individual  usually  feeds  his  purse 
from  his  bank  account ;    a  retail  commercial  firm 

72 


5  6]     n.WK    DKPOSITS   SUIUKCT   TO   (^HECK 


•    I 


usually  feeds  its  bank  account  from  its  till.  The 
bank  acts  as  intermediary  for  both. 

Another  reason  why  money  and  checks  each  have 
separate  spheres,  tending  at  any  given  time  to 
maintain  a  fairly  definite  relation  to  each  other, 
is  that  cash  and  checks  are,  generally  speaking, 
used  by  different  classes.  Wagen-arners  for  the 
most  part  use  only  money,  while  the  professional 
and  propertied  classes  and  "fictitious  persons" 
(i.e.,  corporations,  partnerships,  etc.)  use  mostly 
checks.  At  present  probal)ly  over  half  of  the  fami- 
lies in  the  United  States  use  no  checks. 

For  any  one  individual  the  adjustment  of  cash- 
in-pocket  to  deposits-in-bank  will  be  extremely 
rough ;  for  sometimes  the  one  or  the  other  will  be 
much  too  large  or  too  small.  But,  in  the  community 
as  a  whole,  the  adjustment  of  the  cash  to  deposits 
used  will  be  very  delicate  ;  for  the  temporary  aberra- 
tions of  many  thousands  of  individuals  will  ordinarily 
almost  completely  neutralize  each  other. 

In  a  given  community  the  quantitative  relation  of 
deposit  currency  to  money  is  determined  by  several 
considerations  of  convenience.  In  the  first  place,  the 
more  highly  developed  the  business  of  a  community, 
the  more  prevalent  the  use  of  checks.  Where  busi- 
ness is  conducted  on  a  large  scale  merchants  habit- 
ually transact  their  larger  operations  with  each  other 
by  means  of  checks,  and  their  smaller  ones  by  means 
of  cash.  Again,  the  more  concentrated  the  popula- 
tion, the  more  prevalent  the  use  of  checks.     In  cities 

73 


ll 


V  i 

■  m 


ii; 

m 


% 


m 


■i 


plf 


WHY    IS  TIIK    DOLLAR   SHRINKING?    [Ch.  IV. 

it  is  more  convenient  both  for  the  piiyer  and  tlie  payee 
to  make  larjje  payments  by  check;  whereas  in  the 
country,  trii)s  to  a  bank  are  too  expensive  in  time  and 
effort  to  Ix'  convenient,  and  therefore  more  money  is 
used  in  proportion  to  tiie  amoun*  ^f  business  done. 

There  is,  then,  a  relation  of  convenience  and  cus- 
tom between  checks  and  cash  circuhition,  and  a 
more  or  less  stable  ratio  between  the  usual  deposit 
balance  of  the  averaj^e  man  or  cor|)oration  and  the 
usual  fund  of  money  kept  in  pocket  or  till.  This 
fact,  as  applied  to  the  country  as  a  whole,  means 
that  by  convenience  a  fairly  definite  ratio  is  fixed 
between  M  and  M'.  If  that  ratio  is  disturbed  tem- 
porarily, there  will  come  into  play  a  tendency  to 
restore  it.  Individuals  will  deposit  surplus  cash 
or  they  will  cash  surplus  ileposits. 

Hence,  both  money  in  circulation  (as  shown  above) 
and  money  in  reserve  (as  shown  previously)  tend 
to  keep  in  a  fixed  ratio  to  deposits.  It  follows  that 
the  two  must  be  in  a  more  or  less  definite,  though 
elastic,  ratio  to  each  other. 

§  6.  Summary 

The  contents  of  this  chapter  may  be  formulated 
in  a  few  simple  propositions. 

(1)  IJanks  supply  two  kinds  of  currency,  viz., 
bank-notes  —  whicli  ;ire  money;  and  bank  deposits 
(rifjhts  to  draw)  —  which  are  not  money. 

(2)  .\  biink  check  is  merely  presumptive  evidence 
of  a  right  to  draw. 

74 


fi£Km^. 


1!^  . 


S  O.J    BANK    DKPOSITS   SUBJKCT   TO  CFIKCK 

(M)  Hchiiifl  tlic  cliiiiiis  (»f  (lc|)()sit(»rs  ii?i<l  ?u)t(' 
hoMcrs  stand.  lu.t  .simply  the  cash  rcservo,  but  all 
the  assets  of  the  hank. 

(\)  l)ei)<)sit  hankiii;^  is  a  <l(-viee  l»y  which  wealth, 
incapable  of  direct  circulation,  may  he  made  the 
basis  of  the  circulation  of  ri^dits  to  draw. 

(.>)  The  basis  of  such  circulating  rights  to  draw 
or  deposits  must  consist  in  part  of  actual  money, 
anti  it  .should  consist  in  j;art  also  of  quick  assets 
readily  exchangeable  for  money. 

((>)  Six  sorts  of  exchange  exist  among  the  three 
classes  of  goods,  money,  deposits,  and  other  goods. 
Of  these  six  sorts  of  exchange,  the  most  important 
for  our  present  puri)oses  are  the  exchanges  of  money 
and  dcf)osits  against  other  goods. 

(7)  The  equation  of  exchange,  extended  so  as  to 
make  it  include  l)ank  deposits,  reads  thus :  — 

MV-\-MV'  =  ^pQ  =  PT. 

(8)  Bank  deposits  {M')  tend  to  keep  a  normal  ratio 
to  bank  reserves  and  to  the  quantity  of  money  ( .1/) ; 
because,  in  the  first  place,  casli  reserves  art       r,<. 
sary   to   support   bank   deposits,   and   these    mu 
bear  some  more  or  less  constant  ratio  to  the  anion nt 
of  sucli  deposits;   and  because,  in  the  seiond  place 
business  convenience  dictates  that  the  (irculatink 
medium  or  currency  shall  be  apportioned  betwe.i 
deposits  and  money  in  a  certain  more  or  less  definite, 
even  though  elastic,  ratio. 


'      i 


if  m 


iii 


I 


■i  f 

r 


40 


k 


niAlTKU  V 


TUAN.SITIOX    PKHIODS  — (  KISKS    VXD    DEPUESSIONS 

§  1.  Rising  I>rices 

Wf,  arc  now  ready  to  study  temporary  or  transi- 
tional clianfjcs  in  the  nia^nitndi's  in  the  equation 
of  exchaiij;e  Let  ns  he^in  hy  assuming  a  slight 
initial  dLsturhance.  sueh  as  that  produced,  for  in- 
stance, hy  an  increase  in  the  quantitv  of  money. 
This,  throuj;h  the  equation  of  exchange,  will  cause 
a  rise  in  i)rices.  As  prices  lise,  pn)fits  of  business 
men  measured  in  money  will  rise  also.  This  will 
be  true  evei  the  costs  of  business  rise  in  the 
same  proportio...  Thus,  if  a  man,  who  formerly 
sold  goods  for  .S10,(K)(>  which  cost  S6000,  clearing 
84000,  could  now  get  double  prices  at  double  cost, 
his  profit  wouhl  double  also,  being  .S2U,()00  -  S12,U00, 
or  SSOOO.  Of  course,  such  a  rise  of  profits  would 
be  purely  nominal,  as  it  would  merely  keep  pace 
with  the  rise  in  price  level.  The  business  man  would 
gain  no  advantage;  f,)r  his  large  i.ioney  profits  now 
would  l)uy  no  more  than  his  small  money  profits 
bought  before. 

But,  as  a  matter  of  fact,  die  business  man's  i)rof- 
its  will  usually  rise  much  more  than  this,  be.ause 
many  of  his  expenses  will  tend  to  remain  the  .same. 
In  particular  his  payniLUts  to  his  creditors  for  in- 

70 


i    'i 


1 1 


TfiANsiTroX    I'KinODs 


tcrest  on  past  loans,  t..  his  lan.II.)r<l  for  rent   and  to 
his  employees  for  salaries  an.l  ua^.s  will  f„r  a  time 
remam  unafrecte.i  or  little  afFeet.-.!  I,v  the  ^f-neral 
me  m  priees.       (•ons..(,u,-ntly.  he  will  Hrul  himself 
makmg  greater  profits  than  nsual,  an.l  be  .'nco.iraK'ed 
to  expa.ul   his  hn>i,H-ss   hy   inereasin^j  his   borrow- 
ings.     These  ImrrowinKs  are  mostly  in  the  form  of 
.short-tnne  loans  fron.  I,a,.ks;   and.  as  w,-  have  seen 
sueh   loans  ..ngender  d,-posits.     Therefore.  d,.r,„sit 
eurrency  (J/')  will  inerease.     But  this  extension  c.f 
deposit  enrreney  tends  further  to  raise  the  Reneral 
level  of  pnees.  just  as  the  increase  of  gold  raised 
It  m  the  first   plaee.     This  further  rise  of  prices 
enables  borrowers  who  are  now  reoeivi-g  greater 
profits  to  reeeive  still  greater  profits.     Borrowing, 
already    stimulated,    is    stimulated    still    further 
More  loans  are  demanded,  and.  with  the  resulting 
expansion   of   bank   loans,   dejmsit  eurrency  (M') 
already  expanded,  expands  still  more.     Hence  prices 
rise  still  further. 

This  sequence  of  events  may  be  brieflv  stated  as 
follows :  — 

(1)  Prices  rise  (whatever  the  first  cause  mav  be- 
we  have  chosen  for  illustration  an  increa.se  in  the 
amount  of  money  in  circulation). 

(2)  "Enterprisers"  -  persons  who  undertake 
business  enterprises  of  various  kinds  -  get  much 
higher  prices  than  before,  without  having  much 
greater  expenses  (for  interest,  rent,  salaries,  etc.), 
and  therefore  make  much  greater  profits. 

77 


l^j 


If. 


fl 


y 


M 

ill  •% 

'I '2, 

m 
M 

fi 


li 


m 


WHY   IS  THE   DOLLAR  SHRINKING?    {Ch.  v. 

(3)  Enterpriser-borrowers,  encouraged  by  large 
profits,  increase  their  borrowings. 

(4)  Deposit  currency  {M')  expands  relatively  to 
money  (M). 

(5)  Because  of  this  expansion  of  deposit  currency 
(M')  prices  continue  to  rise ;   that  is,  phenomena 
No.  1  is  repeited.    Then  No.  2  is  repeated,  and  so  on. 

In  other  w'ords,  a  slight  initial  rise  of  prices  sets 
in  motion  a  train  of  events  which  tends  to  repeat 
itself.  Rise  of  prices  generates  rise  of  prices  and 
continues  to  do  so  as  long  as  the  enterprisers'  profits 
continue  abnonnalljf  high. 

§  2.  How  a  Rise  of  Prices  culminates  in  a  Crisis 

The  expaii.  ..in  in  deposit  currency  indicated  in 
this  cumulative  movement  abnormally  increases 
the  ratio  of  deposits  (M')  to  money  (M).  This, 
however,  is  not  the  only  disturbance  caused  by  the 
increase  in  M.  There  are  disturbances  to  some  ex- 
tent in  r,  in  r,  and  in  V'.  In  particular,  trade 
(T)  will  lx»  stimulated  by  the  stimulation  of 
loans.  New  constructions  of  buildings,  machinery, 
etc.,  are  entered  upon.  These  effects  are  always 
observed  during  rising  prices,  and  people  note  ap- 
provingly that  "i)usiness  is  good"  and  "times  are 
booming."  Such  statements  represent  the  point 
of  view  of  the  ordinary  business  man  who  is  an 
"enterpriser-borrower."  They  do  not  represent 
the  sentiments  of  the  creditor,  the  salaried  man,  or 
the  labourer,  most  of  whom  are  silent  but  long-sufFer- 

78 


fi 


§2.J 


TRANSITION   PKRIODS 


ing.  paying  higher  prices,  but  not  getting  propor- 
tionally higher  incomes. 

Such  one-sided  expansion  cannot  proceed  forever 
It  must  ultimately  spend  itself.     The  unadjusted 
elements  ultimately  adjust  themselves  with  a  jump. 
The  landlord  raises  his  rent  at  the  first  opportunity. 
The  employee  demands  more  pay,  often  striking 
to  get  It.     The  creditor  raises  the  rate  of  interest. 
The  whole  situation  is  changed.    The  banks  are 
forced  in  self.lefence  to  refuse  loans  (or  at  anv  rate 
o  discourage  loans  by  making  harder  terms  for  ihem) 
because  they  c-annot  permit  so  abnormal  an  expan- 
sion of  loans  relatively  to  reserves.     To  allow  such 
expansion  to  continue  would   mean  breaking  the 
law   and   might   mean   breaking  the  bank.     Then 
borrowers  can  no  longer  hope  to  make  great  profits 
and  loans  cease  to  expand. 

Now  an  enterprise,  which  is  started  bv  borrowing 
;s  expected  to  be  continued  by  renewed  borrowing 
But  with  loans  hard  to  get.  those  persons  who  have 
counted   on   renewing   their   loans   on   the   former 
terms  and  for  the  former  amounts  are  unable  to  do 
so.     It  follows  that  those  of  them  who  cannot  con- 
trac^  new  debts  and,  without  contracting  such  new 
^leb  s.  cannot  pay  old  ones,  are  destined  to  become 
insolvent   and    fail.     The    failure    (or   prospect   of 
f.i.lure)  of  firms  that  have  borrowed  heavilv  from 
banks  induc.es  fear  on  the  part  of  many  depositors 
that  the  banks  will  not  be  able  to  realize  on  these 
loans.     Hence  the  banks  themselves  may  fall  under 


79 


'H 


I 


m 


% 


is 

K 


^:kM 


m.v&:i^^^sn^ 


I 


WHY    IS  THE   DOLLAR   SHRINKING?    [Ch.  V. 

suspicion  and  their  depositors  demand  cash.  Then 
occur  those  "runs  on  the  banks"  which  deplete  the 
bank  reserves  at  the  very  moment  they  are  most 
needed  to  pay  tlie  demands  of  the  depositors.  Being 
short  of  reserves,  the  banks  have  to  curtail  their 
loans.  Any  renewed  borrowing  becomes  difficult 
or  impossible,  and  even  the  original  loans  may  be 
"called"  by  the  banks.  Those  enterprisers  who 
are  caught  unist  have  money  or  credit  to  liquidate 
their  obligations  or  else  become  insolvent.  Some 
of  them  are  destined  to  become  bankrupt,  and, 
with  their  failure,  the  demand  for  loans  is  corre- 
spondingly reduced. 

This  culmination  of  an  upward  price  movement  is 
what  is  called  a  crisis  —  a  condition  characterized 
by  failures  due  to  lack  of  cash  when  and  where  it  is 
most  needed. 

These  bankruptcies  tend  to  spread ;  for  when  a 
man  cannot  pay  his  creditors,  the  latter  in  turn  find 
difficulty  in  paying  theirs.  In  this  way  the  fall  of 
one  firm  is  communicated  successively  to  many 
others,  as  one  brick  in  a  row  may  knock  down  the 
whole  ••  w. 


§  3.  Completion  of  the  Credit  Cycle 

After  the  crisis,  a  reaction  sets  in.  Bank  loans 
tend  to  be  small,  and  consequently  deposits  (3/') 
are  reduced.  The  contraction  of  deposit  currency 
makes  prices  fall  still  more.  Those  who  have  bor- 
rowed for  the  purpose  of  buying  stocks  of  goods,  now 

80 


•  i»»r.v  ^r 


§3.] 


TRAXSITIOX   PERIODS 


find  they  cannot  soli  them  for  enough  even  to  pay 
back  what  they  have  Imrroued.  The  sequence^ of 
events  is  now  the  opposite  of  what  it  was  before  •  - 

(1)  Prices  fall. 

(2)  Enterprisers  g(>t  much  lower  prices  than  be- 
fore without  having  much  lower  expenses   (for  in- 

erest,  rent,  salaries,  etc.).  and  tlierefore  make  much 
lower  profits. 

(3)  Enterpriser-borrowers,  discouraged  by  small 
profats,  contract  their  borrowings. 

(4,^    Deposit  currency  (J/'j  contracts  relatively 
to  money  (J/).  *^ 

(5)    Because  of  this  contraction  of  deposit  cur- 
rency (J/  )  pnces  continue  to  fall ;  that  is,  phenom- 
enon No.  1  is  repeated.     Then  Xo.  2  is  repeated 
and  so  on. 

Thus  a  fall  of  prices  generates  a  further  fall  of 
pnces.     The  cycle  evidently  repeats  itself  as  long  as 
the  enterprisers'  profits  remain  abnormalh-  low     The 
man  who  loses  most  is  the  businessman  in  debt     He  is 
the  typical  business  man,  and  he  now  complains  that 
business  is  bad."     There  is  a  "depression  of  trade." 
Ihe  contraction  becomes  .self-limiting  as  soon  as 
oans  are  easier  to  get.     Banks  are  led  to  make 
loans  easy  in  order  to  get  rid  of  their  accumulated 
.eserves.     After  a  time,   normal   conditions   begin 
to  return.     The  weakest  producers  have  been  forced 
out,  or  have  at  least  been  prevented  from  expan<i- 
i"g  their  business  by  increased  loans.     The  strongest 
firms  are  left  to  build  up  a  new  credit  structure 

SI 


? 


ii 


If-  ~ 


I 


111- 


'  ii 


WHY    FS   TIIP]    DOLLAR   SHRINKING?    [Ch.  v. 


1 


I'i^ 


Borrowers  ajiain  become  willinjj  to  take  ventures  ;  fail- 
ures decrease  in  number;  l)ank  loans  cease  to  de- 
crease ;  ])rices  cease  to  fall ;  borrowing  and  carrying 
on  business  becomes  prontable  ;  loans  are  again  de- 
mancK  \  ;  prices  again  begin  to  rise,  and  there  occursa 
repetition  of  the  upward  movement  already  described. 

The  upward  and  downward  movements  taken 
together  constitute  a  complete  credit  cycle,  which 
resembles  the  forward  and  backward  movements  of 
a  i)endulum. 

Many  historical  examples  could  be  cited.  The 
discovery  of  gold  in  California  in  the  middle  of  the 
last  century  was  followed  by  an  inflation  of  the 
world's  currencies,  first  through  the  new  gold  and 
later  through  expansion  of  deposit  currency  as  well. 
Prices  rose  raj)idly  ;  business  men  made  high  profits ; 
times  were  good  until  ISo?,  wiien  a  crisis  oc- 
curred both  in  the  United  States  and  Europe.  This 
was  followed  by  a  sharp  fall  in  prices,  a  depression 
in  trade,  a  recovery,  and  another  period  of  inflation 
culminating  in  a  second  crisis  in  ISOG.  Again  the 
pendulum  swung  back  «)nly  to  return  again  in  the 
crisis  of  IS?;^  A  more  recent  example  is  found  in 
the  gold  inflation  beginning  in  1896  in  consequence  of 
the  enormous  gold  production  in  the  Transvaal,  in 
Cripple  Creek,  and  in  the  Klondike.  The  money 
in  circulation  in  the  United  States  doubled  in  eleven 
years  (1S9()-1!)07),  bank  deposits  subject  to  check 
nearly  trebled,  and  prices  rose  one-half.  "Pros- 
perity" (that  is,  profitable  business  from  the  point 

82 


.^k^tai^Tfft^  "i^'^^-mM^M^mi': 


§  4] 


TRAXSITIOX    I'KRIODS 


of  view  of  the  enterpriser)  at  first  seemed  l>oundiess 

In  1907  the  wave  br(,ke  in  the  crisis  of  that  year 

followed  by  a  (..ntraction  of  dep„sits  an.i  a  fall  of 

prices  in  the  next  ycnr  with  a  ^ra.lual  reeoverv  in 

the  years  immediately   followinjr.     Then  the  eyele 

iH'Kan  again  and  we  haxc  just  apparently  passe.l'the 

crest  again,  although   nothing  acute  enough  to  he 

called  a  severe   crisis   has   occurred.     The  jolt    to 

credit  in  lOl.'i  was  much  milder  than  in  1907  and 

we  are  apparently-  soon  to  enter  on  another  period  of 

expansion. 

We  have   corsidered   the   rise,  culmination,  fall 
nd  recovery  of  prices.     In   most  cases  the  time' 
)ccupied  by  the  swing  of  the  commercial  pendulum 
to  and  fro  is  about  ten  years.     While  the  pendulum 
IS  continually  seeking  a  stable  position,  practicallv 
there  is  almost  always  some  occurrence  to  prevent 
perfect  equilibrium.     Oscillations  are  set  up  which 
though  tending  to  be  self-corrective,  are  continually 
perpetuatcl    by   fresh    disturbances.     The    oscilla- 
tions  are  like  those  of  a  ship  in  a  rough  sea.     While 
in  a  calm  sea  a  ship  will  "pitch"  only  a  few  times 
before  coming  to  rest,  in  a  high  sea  the  pitchin-^ 
never  ceases ;  though  continually  seeking  equilibrium! 
the  ship  continually  encounters  causes  which  accen- 
tuate the  oscillations. 

§  4.  The  Safeguard  of  High  Interest 

The  foregoing  sketch  of  prices  giy(>s.  of  course, 
only  the  elementary  features  of  price  cycles.     In  any 

S3 


lEi' 


ti 


'iti 


WHY    IS   THE    DOLLAR   SHItlNKlXd?    [Cn.  V. 


1 


actual  ciise  numerous  special  factors  enter.  It 
would  divert  >is  too  far  from  the  main  purpose  of 
this  book  to  go  into  further  details  on  this  subject. 
For  such  details  the  reader  is  referred  to  Prof. 
Wesley  C.  Mitchell's  great  monograph,  "Business 
Cycles."  » 

Before  leaving  this  subject,  however,  I  shall 
take  the  opportunity  to  enlarge  a  little  on  what  has 
been  said  about  the  rate  of  interest;  for  this  plays 
a  central  role  in  credit  cycles  and  one  which  is  not 
generally  appreciated.  ^Vlost  people  want  the  rate 
of  interest  always  to  be  low  and  when  in  crises  it  is 
high  they  blame  the  banks  for  raising  it.  But  the 
truth  is  that  the  banks  are  usually  to  blame  for  not 
raising  it  early  enough  to  prevent  the  crisis. 

The  rate  of  interest  tends  to  be  and  ought  to  be 
high  when  the  prices  are  rising ;  and,  reversely,  tends 
to  be  and  ought  to  be  low  while  prices  are  falling. 
Suppose,  for  instance,  that  prices  are  rising  at  the 
rate  of  1  per  cent  per  annum.  Then  SlOO  lent 
to-day  is  equivalent  in  purchasing  power,  not  to 
SlOO  repayable  next  year,  but  to  -SlOl  repayable 
next  year.  Thus  the  lender,  when  he  gets  back  his 
principal  of  only  SlOO,  does  not  get  back  as  much 
purchasing  power  as  he  lent,  and  the  borrower  does 
not  pay  back  as  much  purchasing  power  as  he  bor- 
rowed. In  other  words,  the  fact  that  prices  have 
risen  during  the  year  has  made  things  easier  for  the 
borrower  and  harder  for  the  lender.     During  the 

'  Berkeley  (University  of  California  Press),  1913. 

84 


:.:Vi  . 


§  4] 


TUAXSITION    PERIODS 


Ci\il  War,  after  tlie  I'liited  States  government  hud 
inflated  the  curreney  with  "greenbacks,"  tlie  first 
result  was  a  rise   of    prices,  and    the   next    result 
was   that   men    who   had    mortgaged    their    farms 
in  the  West  found  it  easy  to  pay  hack  their  loans. 
As  they  said,  the  mortgages  on  th'-'r  farms  "dis- 
appeared like  smoke."     Five  thousand  dollars  paid 
back  in  1804  for  SoOOO  loaned  in  ]8G()  really  repre- 
sented only  half  as  much  purchasing  power  over 
goods ;  for  prices  had  doubled.    That  is,  the  inflation 
of  the  currency  freed  the  borrowers  from  half  their 
debts.     We  see,  then,  that  when  prices  are  rising, 
the  principal  of  a  debt  becomes  less  and  less  valuable.' 
If  prices  are  rising  1  per  cent  per  annum,  that  is, 
if  the  principal  of  the  debt,  in  terms  of  goods,  is 
falling  about  1  per  cent,  then  the  interest  on  the 
debt  ought   to  be  increased  about  1    per   cent   in 
order  that  there  should  be  the  same  burden  on  the 
borrower  as  there  would  have  been  if  prices  had 
not  risen.     If  the  prices  are  rising  2  per  cent  per 
annum,  2  per  cent  would  have  to  be  added  to  the 
rate  of  interest  in  order  to  compensate  for  the  rise ; 
and  so  on  for  other  rates  of  rise  in  prices.     On  the 
other  hand,  if  prices  are  falling,  tne  rate  of  interest 
ought  to  be  reduced  in  order  to  offset  the  apprecia- 
tion of  the  principal. 

This  ideal  compensation  in  the  interest  rate  might 
occur  if  man's  foresight  were  perfect,  and  as  a  mat'ter 
of  fact  an  approximation  at  such  adjustment  does 
actually  occur.     A  statistical  study  of  the  periods 

85 


»'<J 


J 


'*, 


m 

is 


'I 


fi! 


w 


fS 


■If:* 


WHY    IS   THE    DOLLAR   SIIHINKINa?    [Cii.  v 


P 


of  risinp  and  fallinp  prices  in  tho  ITiiitcd  States, 
Knf;hui<l,{iennaiiy,  France,  Cliina,  Japan,  and  India 
shows  that,  in  general,  when  prices  are  rising,  the 
rate  of  interest  is  high,  and  when  prices  are  faUing 
it  is  h)W.  Although  partially  adjusted  during  transi- 
tion period,  it  is  not  sufficiently  adjusted.  The 
essential  fact  remains  that  during  falling  prices 
the  burden  of  debts  grows  greater,  and  during  ris- 
ing prices,  less.  Were  the  rate  of  interest  properly 
and  promptly  adjustcil.  crises  would  be  fewer  and 
they  would  be  less  severe. 

IIow,  then,  can  we  get  a  better  adjustment  of 
the  rate  of  interest  ?  One  way  is  to  prevent  these 
changes  in  price  levels  as  much  as  possible  —  to 
"standardize"  the  dollar.  This  may  be  a  long  time 
in  hapi)ening.  A  second  way  is  for  business  men 
to  become  more  alive  to  the  future  and  more  (juick 
to  ])redict  what  is  going  to  happen  to  prices.  Edu- 
cation in  this  line  will  go  on  and  is  going  on  through 
the  trade  journals. 

A  third  way  is  through  the  removal  of  the  exist- 
ing jirejudice  against  raising  the  rate  of  interest. 
We  still  inherit  the  old  idea  that  interest  is  "usury" 
or  robbery.  If  we  could  once  get  rid  of  the  preju- 
dice against  allowing  the  rate  of  interest  to  rise  high 
as  well  as  to  fall  low,  that  is,  could  regard  the  rate 
of  interest  as  properly  subject  to  fluctuation  and  as 
being  a  market  price  changing  day  by  day,  like  any 
other  price,  a  long  step  would  be  taken  toward  pre- 
venting crises. 

SO 


i4.] 


TRANSITION    PKRIODS 


A  fourth  way  is  to  make  crt-clit  more  clastic. 
This  is  to  be  accomplished  by  the  new  currency 
act.  Hitherto  in  the  I'liited  States,  the  banks  after 
allowing  loans  at  too  low  a  rate  and  so  e\i)anding 
them  unduly,  have  suddenly  ceased  loaning  when, 
as  at  a  crisis,  tlie  legal  limit  of  reserves  was  reache(l. 
Instead  of  this  sudden  rigid  limit  to  loans  the  new 
act  will  place  an  elastic  limit;  for  the  banker  can 
secure  loanable  funds  by  "rediscounting"  some  of 
his  loans  with  the  federal  reserve  bank.  In  this 
way  he  can  always  extend  accommodation  to  cus- 
tomers, although  at  higher  rates.  A  sound  business 
man  has  the  right  to  expect  his  bank  to  give  him 
necessary  loans  at  all  times,  prox-ided  he  can  and  will 
meet  the  terms  which  the  market  requires.  Hitherto 
he  could  never  be  sure  at  certain  times  of  securing 
loans  on  any  terms  at  all.  The  new  provisions 
should  greatly  reduce  the  danger  and  severity  of 
crises. 


■•■ 


Nil 

ft      'I 


'I 

ill 
I 

ill 

■HI 
if 

If 


|::* 


t 


ri;. 


87 


iiii^: 


F 

? 

J, 

i' ! 

CHAPTER  VI 

REMOTE    INFLUENCES   0\    PRICES 

§  1.  Influence  which  Conditions  of  Production  and 
Consumption  Exert  on  Trade  and  therefore  on 
Prices 

Tins  far  we  have  considered  the  level  of  prices 
as  afl'ected  by  the  volume  of  trade,  by  the  velocity 
of  circulation  of  money  and  deposits,  and  by  the 
quantity  of  money  and  of  deposits.  These  are  the 
only  influences  which  can  (Urn'thj  afTect  the  level  of 
prices.  Any  other  influences  on  prices  must  act 
througli  these  five.  There  are  myriads  of  such  in- 
fluences (outside  of  the  equation  of  exchange)  that 
att'ect  prices  through  the  medium  of  these  five. 
At  the  close  of  the  last  chapter  we  noted  the  effect 
during  transition  pcritxis  of  a  change  or  the  lack  of 
change  in  the  rate  of  interest-  It  is  our  purpose  in 
this  chapter  to  note  some  of  the  outside  influences 
which  at  all  times  affect  the  factors  of  the  equation 
of  exchange. 

We  sludl  first  consider  the  outside  influences  that 
atlVct  the  volume  of  trade  and,  through  it,  the 
price  level.  The  most  iini)ortant  may  be  classified 
as  follows :  — 

88 


i  1]       REMOTE    INFLUENCES   ON    PRICES 


1.  Condition/!  nffrrtirtg  producent. 

(a)  Geographical  (lifFcronct's  in  natural  resources. 
(h)  The  division  of  labour. 
(r)  Knowledge  of  the  technique  of  production, 
(f/)  The  accurnuhition  of  capital. 

2.  Conditions  affecting  consumers. 

(a)  The  extent  and  variety  of  human  wants. 

3.  Conditions  connecting  producers  and  consumers. 
(a)  Facilities  for  transportation. 

{h)   Relative  freedom  of  trade. 

(r)   Character  of  monetary  and  banking  .systems. 

(f/)  Business  confidence. 

That  many  of  these  conditions  promote  trade 
is  so  obvl(  nd  well  known  as  to  require  no  ex- 
planation, le  fact  that  some  parts  of  the  2arth 
produce  wheat,  others  spices,  others  fi.  evi- 

dently tends  to  cause  trade  to  flow  betwct.  .ese 
parts,  while  the  fact  that  ome  groups  of  persons 
devote  them.selvcs  to  farming,  others  to  cloth  mak- 
ing, others  to  building,  etc.,  evidently  implies  trade 
between  these  groups.  It  is  clear  also  that  the 
Slate  of  knowledge  of  the  means  and  methods  of 
production  will  stimulate  trade.  For  instance, 
mines  of  Africa  and  Australia  were  left  unworkcd 
for  centuries  by  ignorant  natives,  but  were  opened 
by  white  men  fxissessing  a  knowledge  of  metal- 
lurgy. Again,  it  is  clear  that  knowledge  to  be  of  use 
must  be  a])plicd ;  and  that  its  application  usually 
requires  the  aid  of  capital.     The  greater  and  the 

89 


If 


I 


!«: 


r^aifavr'V'-^  e^ 


I ' 


^ 


WHY    IS   THK    DOLLAR   SHItlN'KlNCi  .'    Ifii.  VI. 

more  productive  thf  stock  of  capital  in  any  c<tin- 
miiuity,  the  more  jjoods  it  can  put  into  currents  i>f 
trade.  A  iiiill  will  make  a  town  a  eei'tre  of  trade. 
Docks,  ele\ators,  wan-houses,  and  railway  ter- 
minals help  to  transform  a  harbour  into  a  port  of 
commerce. 

.Since  increase  in  tradi'  tends  to  decrease  the  gen- 
eral levj'l  of  prices,  it  is  ol>\  ions  that  anythinj^  which 
tends  to  increase  trade  likewise  tends  to  decrease 
the  jieaeral  levi-I  of  prii-es.  We  conclude,  there- 
fore, that  amon^  the  \arious  causes  which  tend  t«) 
decrease  prices  are  j^reater  ^ef))^raphical  (»r  personal 
speciali/ation,  imi)rovc(l  jjroductive  techniciue,  •" 
the  accumulation  of  capital. 

Almost  equally  obvious  is  the  relation  of  the  extent 
and  variety  of  human  wants  to  the  volume  of  trade. 
Wants  are,  as  it  were,  the  mains])rinjjs  of  economic 
activity  and,  in  the  last  analysis,  keej)  the  economic 
world  in  motion.  The  desire  to  have  clothes  as  fine 
as  the  clothes  of  others,  or  finer,  or  dilferent,  leads 
to  the  multiplicity  of  silks,  satins,  laces,  etc.,  and 
the  same  principle  aj)i)lies  to  furniture,  amuse- 
ments, books,  works  of  art,  and  every  other  mean.s  of 
gratification. 

The  increase  of  wants  in  so  far  as  it  leads  to  an 
increase  in  trade  tends  to  lower  the  price  level. 

The  next  grouj)  of  influenc<'s  mentioned  in  our 
list  are  those  influences  which  conditions  connectinj; 
producers  and  consumers  exert  on  trade  and  there- 
fore on  prices. 

90 


i^lz 


i  1  1       IlKMOTK    INFU'KNCKS   ()\    IMilCKS 

As  Maciiiilay  said,  with  tin-  oxcrption  of  the  alplia- 
l»t  and  the  priiitiiij;-pnss.  no  stt  »)f  iuvnitioiis  has 
ttiidfd  to  altiT  civih/.atioii  so  much  as  thosr  which 
al)ridj,'cdistat»cf-  -such  as  the  railway, the  steamship, 
the  telephone,  the  telcKrapli,  and  that  conveyer  of 
information  and  advertisements,  the  news|)a|MT. 
These  all  tend,  therefore,  to  decrease  prices. 

Hut  trade  harriers  are  not  »nly  physical,  hut 
legal.  A  tariff  between  countries  has  the  same  =n- 
ffuence  in  decreasinjj  trade  as  a  chain  of  mountams. 
The  freer  the  trade,  the  more  of  it  there  will  he. 
Ill  France  many  communities  have  a  local  tariff 
(octroi)  which  tends  to  inti-rfere  witli  local  trade. 
In  the  Tnited  .States  trade  is  free  within  the  coun- 
try ilseif.  hut  between  the  I'nited  .States  an<l  other 
countries  there  is  a  tariff  wall.  The  ver\  fact  of 
increasing  facilities  for  transportation  by  lowering  or 
removing  physical  barriers,  has  stimulated  nations 
and  communities  to  erect  legal  barriers  in  their 
place.  Tariffs  not  only  tend  to  decrease  the  fre- 
quency of  exchanges,  but  to  the  extent  that  they 
prevent  international  or  interlocal  division  of  labour 
ami  make  countries  more  alike  as  well  as  less  pro- 
ductive, they  also  tend  to  decrease  the  amounts 
of  goods  which  can  be  exchanged.  The  ultimate 
effect  is  thus  to  raise  prices.  This  is  the  effect  on 
the  general  level  of  prices  Besides  this  general 
effect  are  the  particular  eff  'ts  on  those  articles  on 
which  duties  are  laid,  but  wiili  these  particular  eli'ects 
we  have  here  nothii!""  tis  do, 

91 


m 


•»„ 


i 

Hi 

11:1 

.Si'.l: 

.1 


SI 

m 

\ 

Vh 

* 

%i 

t  "■ 

,f. 

1.  3 

i 

%  4 

■V  ] 

?'' 


WHY   IS   THE   DOLLAR   SHRINKING  ?     [Ch.  VI. 

Another  sort  of  restriction  on  trade  is  the  "re- 
straint of  trade"  of  monopolins  or  combinations. 
These,  of  course,  Hke  any  other  reduction  in  the 
amounts  of  goods  sold,  tend  to  raise  the  general 
level  of  prices. 

The  development  of  efficient  monetary  and 
banking  systems  tends,  among  other  effects,  to  in- 
crease trade.  There  have  been  times  in  the  his- 
tory of  the  world  when  money  was  in  so  uncer- 
tain a  state  that  people  hesitated  to  make  many 
trade  contracts  because  of  the  lack  of  knowledge  of 
what  would  be  required  of  them  when  the  contract 
should  be  fulfilled.  In  the  same  way,  when  people 
cannot  depend  on  the  good  faith  or  stability  of 
banks,  they  will  hesitate  to  embark  in  extensive 
trading. 

Confidence  not  only  in  banks  in  particular, 
but  in  business  dealings  in  general,  is  truly  said  to 
be  "the  soul  of  trade."  In  South  America  there 
aie  many  places  waiting  to  be  developed  simply 
because  capitalists  do  not  feel  any  security  in  con- 
tracts there.  They  are  fearful  that  by  hook  or  by 
crook  the  fruit  of  any  development  they  may  under- 
take will  be  taken  from  them. 

We  see,  then,  that  prices  will  tend  to  fall  through 
an  increase  in  trade,  which  may  in  turn  be  brought 
about  by  improved  transportation,  by  increased 
freedom  o?  trade,  by  improved  monetary  and  bank- 
ing systems,  and  by  business  confidence. 


92 


§  2]       REMOTE    INFLUENCES   ON    PRICES 

§  2.  Influence  of  Individual  Habits  on  Velocities  of 
Circulation  and  therefore  on  Prices 

Having  examiried  those  causes  outside  the  equa- 
tion which  affect  the  vohime  of  trade,  our  next  task 
is  to  consider  those  outside  causes  which  affect  the 
velocities  of  circulation  of  money  and  of  deposits. 
For  the  most  part,  the  causes  affecting  one  of  these 
velocities  affect  the  other  also.  These  causes  may 
be  classified  as  follows  :  — 

1.  Habits  of  the  individual. 

(a)  As  to  hoarding. 

(b)  As  to  book  credit  and  loans. 

(c)  As  to  the  use  of  checks. 

2.  Systems  oj  payments  in  the  community. 

(a)  As  to  frequency  of  receipts  and  of  disburse- 
ments. 

(b)  As  to  regularity  of  receipts  and  of  disburse- 
ments. 

(c)  As  to  correspondence  between  receipts  and 
disbursements. 

3.  General  causes. 

(a)  Density  of  population. 

(b)  Rapidity  of  transportation. 

Taking  these  up  in  order,  wc  may  first  consider 
what  influence  hoarding  has  on  the  velocity  of  cir- 
culation. Velocity  of  circulation  of  money  is  the 
same  thing  as  its  rate  of  turnover.  It  is  to  be  found 
by  dividing  the  total  payments  effected  by  money 

93 


li 
It 


•f , .  it 


•Hi 


^t;.ii 


,11! 

m 


WHY    IS   THE   DOLLAR   SIIRINKINC.  ?    [Cn.  VI. 

in  a  year  by  the  average  amount  of  money  in  cir- 
culation in  tliat  year.  It  is  an  average  of  the 
rate^  of  turnover  of  tlie  iiulivi(hials  who  compose 
society.  This  velocity  of  circuhition  or  rapidity  of 
turnover  of  money  is  the  greater  for  each  individual, 
the  more  money  he  expends  with  a  given  average 
amount  of  cash  on  hand,  or  the  less  average  cash  he 
keeps  for  a  given  yearly  expenditure.  One  man 
keeps  an  average  of  810  in  his  pocket  and  expends 
SoOO  a  year ;  he  therefore  turn  over  the  average 
contents  of  his  pocket  fifty  tiuicj  a  year.  Another, 
while  expending  the  same  sum  (SoOO),  keeps  the 
more  prudent  average  of  820 ;  he,  therefore,  turns 
over  his  stock  of  cash  only  twenty-five  times  a  year. 

Some  peoi)l(^  are,  by  habit,  always  impecunious 
or  short  of  ready  money  and  tend  to  have  a  high 
rate  of  turnover ;  others  carry  a  full  purse  and  have 
a  slow  rate  of  turnover.  When,  as  used  to  be  the 
custom  in  France,  peoj^le  put  money  away  in  stock- 
ings and  kept  it  there  for  months,  the  circulation 
must  have  been  extremely  slow.  The  same  prin- 
ciple applies  to  deposits. 

Hoarded  money  is  sometimes  said  to  be  witlidrawn 
from  circulation,  but  this  is  only  another  way  of 
saying  that  hoarding  tends  to  decrease  the  velocity 
of  circulation.  The  only  real  distinction  between 
"hoarding"  money  in  a  stocking  or  safe  and  "carry- 
ing" money  in  a  purse  is  one  of  degree.  The  money 
remains  in  the  stocking  or  safe  longer  than  in  the 
purse.     In  either  case  it  may  be  said  to  be  in  cir- 

94 


§  2]       REMOTE    INFLUENCES   ON    PRICES 


culation,  but  when  "hoarded,"  it  circulates  much 
more  slowly.  The  discontinuance  of  hoarding  evi- 
dently tends  to  increase  the  price  level  hy  increasing 
the  velocity  of  circulating  money.  This  must  be 
the  tendency  in  future  generations  when  the  great 
buried  hoards  of  the  Orient  are  put  into  active 
circulation.  This  will  surely  happen  ultimately 
when  Occidental  habits  shall  have  been  generally 
adopted. 

The  habit  of  "charging,"  i.e.,  using  book  credit, 
tends  to  increase  the  velocity  of  circulation  of  money, 
because  the  man  who  gets  things  "charged"  does 
not  need  to  keep  on  hand  as  much  money  as  he  would 
if  he  made  all  payments  in  cash.  A  man  who  daily 
pays  cash  needs  to  keep  cash  for  daily  contingencies. 
The  SNstem  of  cash  pavments,  unlike  the  svstem  of 
book  credit,  requires  that  money  shall  be  kept  on 
hand  in  advance  of  purchases.  Evidently  if  money 
must  be  provided  in  advance,  it  must  be  provided 
in  larger  quantities  than  when  merely  required  to 
liquidate  past  debts.  In  the  system  of  cash  pay- 
ments a  man  must  keep  money  idle  in  advance, 
lest  he  be  caught  in  the  embarrassing  position  of 
lacking  it  when  he  most  needs  it.  With  book  credit 
he  knows  that  even  if  he  should  be  caught  without 
a  penny  in  his  pocket,  he  can  still  get  supplies  on 
credit.  These  he  can  pay  for  when  money  comes 
to  hand.  As  soon  as  this  money  is  received  there  is 
a  use  awaiting  it  to  pay  debts  accumulated.  For 
instance,  a  labourer  receiving  and  spending  S7a  week, 

95 


'i:         'I 


'.  t  ■■ 


n 


i-''i 


i  ■ 


•  -        '  ■  ■ .  i' 


•  »■- 


'^yf^i 


}       a 

i 

1 

!; 

1 

! 

f 

i  i'-- 


ii  " 


WHY   IS   THE    DOLLAR   SHRINKING?    [Ch.  VI. 

if  he  cannot  "charge,"  must  make  his  week's  wages 
hist  through  the  week.  If  he  spends  §1  a  day,  his 
weekly  cycle  must  show  on  hand  on  successive  days 
at  least  S7,  SO,  So,  S4,  S3,  S2,  and  SI,  at  which  time 
anotlier  S7  comes  in.  This  makes  the  average 
balance  S4.  The  rate  of  turnover  (ratio  of  expendi- 
ture to  cash  carried)  would  then  be  S7  divided  by  4, 
or  about  twice  a  week.  But  if  he  can  charge  every- 
thing, and  then  wait  until  pay-day  to  meet  the  result- 
ing obligations,  he  need  keep  nothing  through  the 
week,  paying  out  his  S7  when  it  comes  in.  His 
weekly  cycle  ne-  show  no  higher  balances  than 
S7,  SO,  SO,  SO,  S<\  SO.  SO.  averaging  only  SI ;  the 
turnover  would  then  be  S7  divided  by  1  or  seven 
times  a  week. 

Analogous  to  the  use  of  book  credit  is  the  use  of 
loans  of  any  kind.  In  a  highly  organized  center  of 
trade,  like  the  New  York  stock  or  nroduce  exchanges, 
credit  is  extended  to  an  extreme  degree  in  order  to 
facilitate  the  transactions  of  a  large  volume  of  busi- 
ness without  the  necessity  of  keeping  on  hand  a 
large  cash  balance  of  money  or  deposits  subject  to 
check.  Credit  is  extended  by  loans,  by  allowing 
purchases  on  small  payments  called  "margins," 
and  in  other  ways.  All  these  extensions  of  loan 
credits  tend  to  increase  the  velocity  of  circulation 
of  money  and  deposits. 

Through  1  ook  credit  and  loans,  therefore,  the 
average  amount  of  money  or  bank  deposits  which 
each  person  must  keep  on  hand  to  meet  a  given  ex- 

96 


§  2.)       REMOTK    INFLUENCES   ON   PRICES 


peiuliture  is  made  less.  This  meaiis  that  the  rate 
of  turnover  is  increased ;  for  if  people  spend  the 
same  amounts  as  before,  but  keep  smaller  amounts 
on  hand,  the  quotient  of  the  amount  spent  divided 
by  the  amount  on  hand  must  increase. 

The  iiabit  of  using  checks  rather  than  money  will 
also  affect  ttie  velocity  of  circulation  of  money,  be- 
cause a  depositor's  sur])lus  money  instead  of  being 
hoarded  will  probably  be  put  in  the  bank  in  return 
for  a  right  to  draw  by  check. 

Banks  thus  otter  an  outlet  for  any  surplus  pocket 
money  or  surplus  till  money,  and  tend  to  prevent 
the  existence  of  idle  hoards.  On  the  other  hand, 
surplus  deposits  may  be  converted  into  cash  — 
that  is,  exchanged  for  cash  —  as  desired.  The  net 
result  is  that  those  who  make  use  of  both  cash  and 
deposits  have  the  opportunity,  by  adjusting  the 
two,  to  prevent  either  from  being  idle. 

We  see,  then,  that  these  three  habits  —  the 
habit  of  carrying  small  supj^lies  of  cash  instead 
of  "hoarding,"  the  halit  of  charging,  and  the  habit 
of  using  chc(  ks  —  all  teu'l  to  raise  the  level  of  prices 
through  their  ett'ects  on  the  velocity  of  circulation 
of  money,  or  of  dcjxjsits. 

We  come  next  to  the  influence  of  systems  of  pay- 
ments on  velocities  of  circulation  and  therefore  on 
prices. 

The  more  frequently  money  or  checks  are  re- 
ceived and  disbursed,  the  shorter  is  the  average 
intervjii  between  the  receipt  .'iiid  the  exoenditure 
H  97 


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il 


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!     ! 


WHY   IS  THE    DOLLAR   SHRINKING?    [Ch.  VI. 

of  money  or  checks,  and  the  more  rapid  is  the  veloc- 
ity of  circulation. 

This  may  best  be  seen  from  an  example.  A  chanj^e 
from  monthly  to  weekly  wa^e  payments  tends  to 
increase  the  velocity  of  circulation  of  money.  If  a 
labourer  is  paid  weekly  S7,  and  reduces  this  evenly 
eacli  day,  ending  each  week  empty-handed,  his 
average  cash,  as  we  have  seen,  would  be  little  over 
half  of  S7,  or  about  S4.  This  makes  his  turnover 
nearly  twice  a  week.  Under  monthly  payments, 
the  labourer  who  receives  and  sj)ends  an  average  of 
SI  a  day  will  have  to  spread  the  S.'iO,  more  or  less 
evenly,  over  the  following  thirty  days.  If,  at  the 
next  pay-day,  he  comes  out  em])ty-handed,  his 
average  money  during  the  month  has  been  about 
Slo.  This  makes  his  turnover  about  twice  a  month. 
Thus  the  rate  of  turnover  is  more  rapid  under  weekly 
than  under  monthly  payments,  provided,  of  course, 
the  introduction  of  weekly  payments  does  not  dis- 
turb some  other  factor  influencing  velocity.  If  it 
leads  to  cash  payments  in  place  of  book  credit,  the 
rate  of  turnover  may  really  decrease  instead  of  in- 
creasing. 

Again,  when  the  workman  can  be  fairl.v  certain 
of  both  his  receipts  and  cx})enditures,  he  can,  by 
close  calculation,  adjust  them  so  precisely  as  safely 
to  end  each  ])ayment  cycle  with  an  empty  pocket. 
This  habit  is  extremely  common  among  certain 
classes  of  city  labourers.  On  the  other  hand,  if  the 
receipts  and  expenditures   arc  irregular,  cither  in 

98 


§  2.)       REMOTE   INFLUENCES  ON   PRICES 

amount  or  in  time,  prudenre  requires  the  worker 
to  keep  a  lar},'er  sum  on  hand  to  insure  against  mis- 
haps. Even  when  foreknown  with  eertainty,  irregu- 
lar receipts  refpiire  a  hirger  average  sum  to  be  kept 
on  hand.  We  may,  therefore,  eonelude  that  regu- 
larity, both  of  receipts  and  of  payments,  tends  t(. 
increase  velocity  f)f  circulation. 

We  next  consider  the  eorres])ondence  between 
rcceij)ts  and  disbursements,  i.r.,  making  the  payments 
come  at  nearly  the  same  times  as  the  times  when  the 
receipts  are  obtained.  It  is  manifestly  a  great 
convenience  to  the  spender  of  money,  or  of  deposits, 
if  dealers  to  whom  he  is  in  debt  will  allow  him  to 
postpone  payment  until  he  has  received  his  money 
or  his  check.  This  arrangement  obviates  the  neces- 
sity of  keeping  much  money  or  deposits  <m  hand, 
and  therefore  increases  their  velocity  of  circulation. 
Where  the  payments  which  a  man  is  to  make  for 
rent,  interest,  insurance,  and  taxes  occur  at  periods 
irrespective  of  the  times  when  he  receives  money,  it 
will  be  necessary  for  him  to  accumulate  money  on 
deposits  in  advance,  thus  increasing  the  average 
on  hand,  withdrawing  money  from  use  for  a  time, 
and  decreasing  the  velocity  of  circulation. 

We  conclude,  then,  that  correspondence  and  regu- 
larity of  payments,  no  less  than  frequency  of  pay- 
ments, tend  tf)  increase  prices  by  increasing  velocity 
of  circulati    i. 

We  come  now  to  the  i^-fluences  of  general  causes 
on  \('loriti(,'s  of  circu.liition  and  tlicrefore  on  prices. 

99 


I 


it  .J 


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If1 


h 

u 


WHY    KS  THE    DOLLAR   SHUINKINO  7    (Ch.  VI. 


!J 


The  more  densely  populated  a  locality,  the  more 
rapid  will  be  the  velocity  of  circulation  lu'caiise  there 
will  he  residier  access  to  peoj)lc  from  whom  money  is 
received  or  to  whom  it  is  paid.  Althou^di  there 
are  no  statistics  on  this  subject,  the  velocity  of 
circulation  must  be  slower  in  the  country  than  in 
the  city.  A  lady  who  has  a  city  house  and  a  countrx' 
house  states  that  in  the  country  she  keeps  money 
in  her  purse  "for  weeks,"  whereas  in  the  city  she 
keeps  it  but  a  "few  days."  Pierre  des  P'ssars  has 
woiked  out  the  velocity  of  circulation  of  bank  de- 
posits in  many  European  cities.  P^xamination  of 
his  figures  reveals  the  fact  that,  in  almost  all  cases, 
the  larger  the  town  in  which  the  bank  is  situated, 
the  more  active  the  deposits.  The  Bank  of  Greece 
has  a  turnover  whose  rate  or  rapidity  is  only  four 
times  a  year,  while  that  of  the  Bank  of  France  is  over 
one  hundred  times  a  year. 

Again,  the  more  extensive  and  the  speedier  the 
transportation  in  general,  the  more  rapid  the  cir- 
culation of  money.  Anything  which  makes  it 
easier  to  pass  money  from  one  person  to  another 
will  tend  to  increase  the  velocity  of  circulation. 
Railways  have  tiiis  elTect.  The  telegraph  has  in- 
creased the  velocity  of  circulation  of  deposits,  since 
these  can  now  be  transferred  thousands  of  miles 
in  a  few  minut'  s.  Mail  and  express,  by  facilitating 
the  transmission  of  bank  def)osits  and  mone\-,  have 
likewise  tended  to  increase  their  velocity  of  circula- 
tion. 

100 


i  3.)       REMOTE    INFLUENCES   ON    PRICES 

We  c'oiuludf,  tluMi,  that  (k'lisity  of  population 
and  raj)idity  of  communicutioii  tend  to  increase 
prices  by  increasing  velocities  of  circulation. 

§  3.  Influences  on  the  Volume  of  Deposit  Currency 
and  therefore  on  Prices 

We  have  to  consider  lastly  the  specific  outside 
influences  on  the  volume  of  deposits  subject  to 
check. 

These  are  chiefly :  — 

(1)  The  system  of  bunking  and  the  habits  of  the 
people  in  utilizing  that  system. 

(2)  The  habit  of  charging. 

It  goes  without  saying  that  a  banking  system  must 
be  devised  and  developed  before  deposits  can  afl'ect 
prices  or  even  exist.  The  invention  of  banking 
has  undoubtedly  led  to  a  great  increase  in  deposits 
and  a  consequent  rise  of  prices.  This  has  been  true 
in  spite  of  the  fact  that  the  development  of  efhcient 
monetary  and  banking  systems  tends  to  increase 
the  volume  of  trade  and  to  that  extent  to  lower  tiie 
price  level.  Here,  as  in  miny  other  instances, 
the  effects  of  improving  monetary  and  banking  facili- 
ties are  complex,  affecting  more  than  one  factor  in 
the  equation  of  exchange.  The  price-raising  ett'ect 
is  far  more  important  than  the  price-depressing 
effect.  In  the  future  one  of  the  chief  causes  tending 
to  raise  prices  will  doubtless  be  the  expansion  of 
deposits  subject  to  check. 

We  have  already  seen  tliat  "charging"  increases 

101 


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I' 

p. 


<iti 

1 


WHY    IS  THE    DOLLAR   SHRINKINU?    (Cii.  VL 


1  ■  f , 


(f  »■» 


L 


the  velocity  of  circuliition  of  money.  It  is  iilso  ii 
means  of  iiKxeasinjj  the  vohmie  of  deposits  suhjeet 
to  eheck  ;  that  is,  "eharj^ing"  is  often  a  preliminary 
to  payment  hv  elieek  rather  than  hv  cash  —  if  a  eus- 
tonier  did  not  have  his  obligations  "eharged," 
he  would  pay  by  money  and  not  by  cheek.  The 
ultimate  effect  of  the  practice  of  charfjinj,'.  there- 
fore, is  to  increase  the  ratio  of  check  payments  to 
cash  payments  and  the  ratio  of  deposits  to  money 
carried  {M'  to  M)  and  therefore  to  increase  the 
amount  of  credit  currency  which  a  j;iven  quantity 
of  money  can  sustain. 

This  elfect,  the  substitution  of  checks  for  cash 
payments,  is  probably  by  far  the  most  important 
effect  of  "charf^ing,"  and  exerts  a  powerful  influence 
toward  raisinj;  prices. 

Anythinji  which  tends  to  increase  bank  deposits 
tends  to  that  extent  to  aise  ])rices.  Thus  the 
creation  of  "trusts'"  has  resulted  in  the  issue  of  a 
great  mass  of  stocks  and  Ixmds  which  are  more 
readily  accepted  by  bankers  as  "collateral"  for  loans 
than  the  stocks  and  bonds  of  the  smaller  and  less- 
known  companies  from  which  the  "trusts"  are 
formed.  The  conseciuence  is :  more  bank  loans, 
greater  deposits,  and  a  higher  level  of  prices.  IJe- 
sides  these  and  the  other  ell'ects  of  "trusts,"  which 
have  been  mentioned  elsewhere,  on  the  general  level 
of  i)rices,  there  are  more  obvious  and  direct  effects 
on  the  particidar  ])riccs  of  the  goods  dealt  in  by  the 
*' trusts."     But   vvc   have   acre   auluing  to  do  wilh 

102 


i  .<]       IlEMOTK    INFLUKNCKS   OM    PIUCES 

particular  prices.  Wc  may  observe,  however,  that 
wlieii  trusts  raise  particular  prices  it  does  not  follow 
that  then'hy  they  raise  the  j,'eiieral  level  of  prices. 
I'uless  they  (listurh  the  fivi-  factors,  M,  M',  I',  I", 
or  r,  they  eaiuiot  efl'ect  the  peuoral  level  of  j)ri('es ; 
for  in  that  case,  the  general  level  of  prices,  as  the 
equation  or  exchange  shows,  eould  not  be  <listurbe(l 
either,  and  the  raising  of  prices  of  particular  trust- 
made  articles  would  Imve  to  result  indirectly  in 
lowering  the  prices  of  some  other  goods  enough  to 
compensate. 


1] 


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niAPTEH   VII 

RE?'OTR   INFI.IKNCKS  ().\    I'lMCF.S    ((\>ntiniinl) 

§  1.  Inriuence  of  the  "  Balance  of  Trade  "  on  the 
Quantity  of  Money  and  therefore  on  Prices 

Wk  huv(>  now  coiisidtTcd  those  influences  outside 
the  equiition  of  exehatijre  which  atlect  the  vohune  of 
trade  (7'),  the  velocity  of  circuhition  of  money  and 
deposits  (!'  and  I"),  and  tlie  mnount  of  deposits 
(.1/').  We  have  k'ft  the  outside  iidlueuces  which 
affect  the  quantity  of  money  (.1/). 

The  diief  of  tliese  may  he  chissified  as  follows :  — 

(1)  Influences  operating  throu^li  the  exportation  and 
iuipc/. '  .tion  of  (ii./Mcy. 

(2)  Influences  operating'  through  the  melting  and 
minting  of  money. 

(3)  Influences  operating  tlirough  the  production  and 
consumption  of  money  metals. 

(4)  Influences  of  monetary  and  banking  systems. 

The  first  to  he  consi(h'red  is  the  influe.ice  of  for- 
eign trade  on  the  cpiantity  of  mone\-  in  a  country 
and  therefore  on  its  price  level.  Hitherto  we  have 
confined  our  studies  of  price  levels  to  an  isolated 
community,  having  no  trade  r('.;ti()ns  with  other 
communities.     In  the  modcr  i  world,  however,  no 

lui 


I  1.)         HKMOTK    INFM  FA'C'RS    (ContinHed) 


such  cominuuity  exists,  jiiid  it  is  importuiit  toohsorvp 
tliiit  iiitcriiiitioiial  trudr  ^i\»'s  prcstnt-diiy  problems 
of  money  uml  of  price  level  an  iiitenuitional  char- 
acter. 

If  ail  countries  had  their  own  irredeemable  paper 
money  and  no  money  thai  was  acceptable  elsewhere, 
price  levels  in  ditVerent  countries  would  have  no 
intimate  connection.  Indeed,  the  cotmection  is 
actually  sli>;ht  as  between  countries  which  have 
dilFerent  metallic  standards;  for  example,  between  a 
f;old-basis  and  a  silver-basis  country.  But  where 
two  or  more  nations  trading  with  each  other  tise 
the  .mine  standard,  ihere  is  a  tendency  for  the  |)rice 
level  of  each  to  influence  profoundly  the  price 
level  of  the  other. 

The  price  le  .el  in  a  small  country  like  Switzer- 
land depends  larjrely  upon  the  price  l(>vels  in  other 
countries ;  for  if  the  price  levels  in  these  countries 
is  higher  or  lower  than  in  Switzerland,  the  difference 
will  set  up  trade  currents  which  will  iticrease  or  de- 
crease the  (piantity  of  nion(\v  in  Switzt-rland  and 
tluTefore  raise  «)r  lower  its  level  of  prices  to  corre- 
s])ond  to  the  levels  outsidi-.  Gold,  which  is  the 
|)riniary  or  full-weight  money  in  most  civilized 
nations,  is  in  this  way  constantly  sent  from  one 
country  or  community  to  another.  When  a  single 
small  country  is  under  consideration,  while  it  is 
(juite  correct  to  say  that  the  quantity  of  money  in 
that  country  dett... nines  the  price  level,  we  must 
not  fail  to  note  *hut  t'.ie  ((uantity  of  money  within 

1U5 


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ill 


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WHY   IS  THE   DOLLAR   SHRINKINfl?    [Cii   VII. 

its  borders  is  in  turn  dependent  upon  the  level  of 
prices  outside.  An  individual  country  bears  the 
same  relation  to  the  world  that  a  lajjjoon  bears  U> 
the  ocean.  The  level  of  the  la<,'oon  depends,  ut 
course,  upon  the  quantity  of  water  in  it.  But  'i- 
quantity  of  water  in  it  depends  upon  the  level  >t 
the  ocean.  As  the  tide  in  the  outside  ocean  rises 
and  falls,  the  quantity  of  water  in  the  la^'oon  will 
adjust  itself  accordingly. 

To  simi)lify  the  problem  of  the  distribution  of 
money  amon^  different  coinmiuiities,  we  shall,  for 
^he  time  being,  ignore  the  fact  that  money  consists 
ordinarily  of  material  capabl(>  of  monetary  uses. 
We  shall  therefore  omit  consideration  of  the  disap- 
pearance of  money  througli  melting;  likewise,  for 
the  present,  we  sliall  omit  consideration  of  the  pro- 
(luction  of  money  through  minting. 

Ix^t  us,  then,  considt  r  the  causes  that  determine 
the  quantity  of  money  in  a  state  like  Connecticut. 
If  the  level  of  prices  in  Connecticut  temporarily 
falls  bdow  that  of  the  surrounding  states,  Rhode 
Island,  Massacluisetts,  and  New  York,  the  effect  is 
to  cause  an  export  of  money  from  these  states  to 
Coimecticut,  because  people  will  buy  goods  wherever 
they  an>  ch(>apest  and  sell  them  where\er  they  are 
dearest.  With  its  low  prices,  Coiuiecti'ut  becomes 
a  goo",  place  to  buy  fnrni,  and  a  p»)or  place  to  sell 
in.  But  if  outsiders  buy  of  Connecticut,  they  will 
have  to  bring  money  to  buy  with.  There  will, 
therefore,  be  a  tendency  for  money  to  flow  to  Con- 

lUG 


§  1.]        REMOTE    INFLUENCES   {Continued) 


nec'ticut  until  the  level  of  prices  there  rises  to  a 
level  whieh  will  arrest  the  influx.  If,  on  the  other 
hand,  i)riees  in  (j)nnecti(ut  are  hif^her  than  in  sur- 
rounding states,  it  becomes  a  good  place  to  sell  in 
and  a  poor  one  to  buy  from.  But  if  outsiders  sell 
in  Connecticut,  they  will  receive  money  in  exchange. 
There  is,  then,  a  tendency  for  money  to  flow  out  of 
Connecticut  until  the  level  of  prices  in  Connecticut 
is  lower.  In  general,  money  flows  awa>'  from  places 
where  the  level  of  ])rircs  is  high,  and  toward  places 
where  it  is  low.  Men  sell  goods  when*  they  can 
get  most  money,  and  buy  goods  where  they  will 
have  to  give  the  least  money.  We  say  "money," 
for  in  the  long  run  we  do  not  need  to  consider  the 
interflow  of  bank  deposits;  as  we  have  seen,  in  the 
long  run  deposit  currency  in  each  country  will  main- 
tain a  definite  ratio  to  money.  In  the  long  run 
an  increase  or  decrease  of  money  in  a  country  will 
increase  or  decrease  its  deposits. 

But  it  must  not  be  inferred  that  the  prices  of 
various  articles  or  even  the  general  level  of  prices 
will  become  precisely  the  same  in  ditferent  countries. 
Distance,  ignorance  as  to  where  the  best  markets 
are  to  be  found,  tariffs,  and  costs  of  transportation 
lu'lj)  to  maintain  price  difl'erences.  The  native 
products  of  each  region  tend  to  be  cheaper  in  that 
region.  They  are  exjjorted  as  long  as  the  excess  of 
I)rices  abroad  is  enough  to  more  than  cover  the 
cost  of  transportation.  Ordinarily  a  commodity  will 
not  he  exported  at  a  yrice  which  will  not  at  lead  be 

107 


§ 


M 


'i ':  II 

1 1 

m 

li.  ;-  !S 


m 


A 


WHY    IS   THE    DOLLAR   SHRINKIXC.  '    [Ch    VII. 

equal  to  the  price  In  the  country  of  origin  plus  the 
freight.  Many  commodities  are  siiipped  only  one 
way.  Thus,  wheat  is  shipped  from  the  United 
States  to  England,  hut  not  from  England  to  the 
United  States.  It  tends  to  he  cheaper  in  the  United 
States.  Large  exportations  raise  its  price  in  America 
toward  the  price  in  England,  but  the  American 
price  will  usually  remain  below  the  English  price 
by  the  cost  of  transportation.  A  few  commodities 
may  be  sent  in  either  direction,  according  to  market 
conditions. 

But  although  international  or  interlocal  trade  will 
never  bring  about  exact  uniformity  of  price  levels, 
it  will,  to  the  extent  that  it  exists,  produce  an  adjust- 
ment of  these  levels  toward  uniformity  by  regulating, 
in  the  manner  already  described,  the  distribution  of 
money.  If  one  commodity  enters,  to  any  consider- 
able extent,  into  international  trade,  it  alone  will 
suffice,  though  slowly,  to  act  as  a  regulator  of  money 
distribution ;  for,  in  return  for  that  commodity, 
money  may  flow,  and,  as  the  price  level  rises  or 
falls,  the  quantity  of  that  commodity  sold  is  cor- 
respondingly adjusted.  In  ordinary  intercourse 
between  nations,  even  when  a  deliberate  attempt  is 
made  to  interfere  with  it  by  protective  tariffs,  there 
will  always  be  a  large  munber  of  commodities  thus 
acting  as  outlets  and  inlets. 

And  since  the  quantity  of  money  itself  iii'iectH  prices 
for  all  sorts  of  commodities,  the  regulative  effect  of 
international  trade  api)lies,  not  simply  to  the  com- 

108 


§  1]  REMOTE    INFLUENCES    (Conlinucd) 

moditios  whicli  enter  into  that  trade,  but  to  all 
others  as  well.  It  follows  that  nowadays  inter- 
national or  interloeal  trade  is  constantly  regulating 
I)ri('e  levels  throughout  the  world. 

We  must  not  leave  this  subject  without  emphasiz- 
ing the  effects  of  a  tariff  on  the  purchasing  power  of 
money.  When  a  country  adopts  a  duty  on  im- 
ports, the  tendency  is  for  the  level  of  prices  in  that 
cour'ry  to  rise.  A  tarilf  obviously  raises  the  prices 
of  the  "  protected  "  goods.  But  the  tariff  does  more 
than  that  —  it  tends  also  to  raise  the  prices  of  un- 
proteeted  goods.  Thus,  a  new  tariff  first  causes  a 
decrease  in  imports  but  no  change  in  exports.  The 
foreigner  will,  for  ;i  tui.e,  continue  to  buy  from  the 
protected  country  almost  as  much  as  before.  This 
unchecked  buying  of  goods  means  unchecked  export 
of  goods,  while  the  imports  have  suddenly  been 
checked.  There  will  result,  therefore,  a  temporary 
excess  of  the  protected  country's  exports  over  its 
imports  or  a  so-called  "  favourable  "  balance  of  trade, 
that  is,  a  net  inflow  of  money.  This  inflow  will 
eventually  raise  the  prices,  not  alone  of  protected 
goods,  but  of  unprotected  goods  as  well.  The  rise 
will  continue  till  it  r  aches  a  point  high  enough  to 
put  a  stop  to  the  "favourable"  balance  of  trade,  — 
that  is,  until  the  raised  prices  check  the  purchase 
by  foreigners  of  the  export  goods. 

Although  the  "favourable  balance"  of  trade 
created  by  a  tariff  is  temporary,  it  leaves  behind  a 
pe-manent  increase  of  money  and  of  prices.    This 

109 


II 
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1 

't  ■  If 

■f-    ; 

hi 


I 


ii;' 


I 


■t,f«  !» 


» > 


E    * 

ll    ^k 


I  i: 


::i 


wn 


-^   THE    DOLLAR   SlIRIN'KIXd  ?    ,r„.  VH. 


is  ptTiiaps  the  chief  reason  why  a  protective  tariff 
seems,  to  many,  a  cause  of  {)rosj)erity.  It  furnishes 
a  temporary  stimuhis  not  only  to  protected  inchis- 
tries,  but  to  trade  in  ^^-neral,  which  is,  in  reality, 
simply  the  stimulus  of  money  inflation.  The  jht- 
mancnt  effect  is  to  keep  prices  in  general,  including 
money  wages,  at  a  higher  level  in  the  protected 
country  than  in  free-trade  countries.  This  is  doubt- 
less one  reason  why  .\merican  wages  and  i)rices  are 
higher  than  English. 

The  reduction  of  the  tarifi"  by  the  Underwood  act 
should  tend  to  lower  prices  by  stimulating  imports 
and  causing  an  outflow  of  gold. 

Among  tlie  many  fallacies  connected  with  "the 
balance  of  trade."  is  the  idea  that  unless  the  trade 
between  any  tivo  countries  balances,  one  of  them 
must  be  losing  to  the  other.  But  it  is  only  nec- 
essary that  the  trade  between  any  one  country  and 
all  the  rest  of  the  world  should  balance.  For 
instance,  trade  is  often  triangular  or  indirect.  The 
United  States  may  send  a  surplus  of  exports  to 
Canada,  Canada  send  a  surplus  of  exports  to  Ger- 
many, while  Germany  sends  a  surplus  of  exports  to 
the  United  States. 

Another  common  oversight  in  dealing  with  the  "  bal- 
ance of  trade  "  is  the  failure  to  take  into  account  invis- 
ible items  of  trade,  such  as  freights,  insurance,  bank- 
ing commissions,  tourists,  travelling  expenses,  and 
last,  but  not  least,  payments  for  investment  securities. 
The  export  of  securities  are  very  important  items 

110 


§  2.)  REMOTK    INFLUENCES    (Coutiruied) 


in  internatioiiiil  trade.  Even  the  interest  coupons 
on  past  indebtedness  form,  in  the  ease  of  many  coun- 
tries, inchuliiif;  the  Tnited  States,  very  hirj,'e  items. 
Finally,  though  all  these  invisible  items  be  accu- 
rately measured,  the  ■  would  still  be  a  slight  dif- 
ference between  exports  and  imports,  owing  to  the 
fact  that  there  is  not  always  a  quid  pro  quo,  but  that 
some  international  trade  represents  gifts.  This  is 
particularly  true  in  the  case  of  the  United  States  in 
which  many  of  the  immigrants  send  remittances  to 
their  relatives  in  "the  old  country." 

§  2.  Influence  of  Melting  and  Minting  on  the  Quan- 
tity of  Money  and  therefore  on  Prices 

We  have  seen  how  M  in  the  equation  of  exchange 
is  affected  by  the  imj^ortation  or  exportation  of 
money.  Considered  with  reference  to  the  M  in 
any  one  of  the  countries  concerned,  the  iVs  in  all 
the  others  are  "outside  influences." 

Troceeding  now  one  step  farther,  we  must  con- 
sider those  influences  on  M  that  are  not  only  out- 
side r.f  the  equation  of  exchange  for  any  particular 
country,  but  also  outside  that  for  the  whole  world. 
Besides  the  monetary  inflow  and  outflow  through 
importati(m  and  exportation  there  is  an  inflow  and 
outflow  through  minting  and  melting.  In  other 
words,  not  only  do  the  stocks  of  money  in  the  world 
connect  with  each  other  like  interconnecting  bodies 
of  water,  but  they  connect  in  the  same  way  with 
the  outside  stock  of  bullion.     In  the  modern  world 

111 


:    I'         l 

'!    If 


Hi 


I   '  if 

■      i   fa 

V       * 


.1      .f 

M 


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■ri 


WHY    IS   THE    DOLLAli    SllKlNKINCJ?    [Ch.  VII. 

one  of  the  precious  metals,  such  as  gold,  usually 
plays  the  part  of  primary  money,  and  this  metal 
has  two  uses  —  a  monetary  use  and  a  commodity 
use.  That  is  to  say,  gold  is  not  only  a  money  ma- 
terial, l)ut  a  commodity  as  well.  In  their  "haracter 
of  commodities,  the  precious  metals  are  raw  materials 
for  jewelry,  works  of  art,  and  other  products  into 
which  they  may  be  wrought.  It  is  in  this  unmanu- 
factured or  raw  state  that  they  are  called  bullion. 

Gold  money  may  be  changed  into  gold  bullion, 
and  vice  versa.     In  fact,  both  changes  are  going  on 
constantly,  for  if  the  value  of  gold,  as  compared  with 
other  commodities,  is  greater  in  the  one  use  than  in 
the  other,  gold  will  immediately  flow  toward  which- 
ever use  is  more  profitable,  and  the  market  price  of 
gold  bullion,  in  terms  of  gold  money,  will  determine 
the  direction  of  the  flow.     Since  100  ounces  of  gold 
-/o  fine  can  be  transformed  into  18G0  gold  dollars, 
the  market  value  of  so  much  gold  bullion,  /o  fine, 
must  tend  to  be  S1800.     If  it  costs  nothing  to  have 
bullion  coined  into  money,  and  nothing  to  melt 
money  into  bullion,  there  will  be  an  automatic  flux 
and  reflux  from  money  to  bullion  and  from  bullion 
to  money  that  will  prevent  the  price  of  bullion  from 
varying  greatly.     If  the   price   of   gold  bullion   is 
greater  than  the  money  which  could  be  minted  from 
it,  for  instance,  if  100  ounces  of  gold  sell  for  S1861, 
the   users  of   gokl   who   require   bullion  —  notably 
jewelers  —  will   save  the  SI  difference  by  melting 
S1860  of  gold  coin  Into  100  ounces  of  bullion.     Con- 

112 


5  I'l         REMOTE   INFLUENCES   (Continued) 

tniriwise,  if  the  price  of  hullion  is  less  than  the  vahie 
of  gold  coin,  say  .SLS,')!),  the  owners  of  bullion  will 
save  the  SI  difference  by  takinjj:  100  ounces  of 
bullion  to  the  mint  and  havinjj  it  coined  into  18(50 
goKl  dollars,  fhe  effect  of  melting  coin,  on  the  one 
hand,  is  to  decrease  the  amount  of  gold  money  and 
increase  the  amount  of  gold  bullion,  thereby  lower- 
ing the  value  of  gold  as  bullion  and  raising  the  value 
of  gold  as  money;  and  thereby  also  lowering  the 
price  level  and  restoring  the  equality  between 
bullion  and  money.  The  effect  of  minting  bullion 
into  coin  is,  by  the  opposite  process,  to  bring  the 
value  of  gold  as  coin  and  the  value  of  gold  as  bullion 
into  equilibrium. 

When  a  charge  called  "seigniorage"  is  made  for 
changing  bullion  into  coin,  or  where  the  process  in- 
volves expense  or  delay,  the  flow  of  bullion  into 
currency  will  l)e  to  that  extent  im{)eded.  But  under 
a  modern  s\stem  of  free  coinage  and  with  modern 
methods  of  reducing  coin  to  bullion,  both  melting 
and  minting  may  be  performed  so  inexpeiisively  and 
so  quickly  that  there  is  practically  no  cost  or  delay 
involved.  In  fact,  there  are  few  instances  of  more 
exact  i)rice  adjustment  than  the  adjustment  between 
gold  bullion  and  gold  coin.  It  follows  that  the 
quantity  of  money  and,  therefore,  its  purchasing 
power,  is  directly  dependent  on  that  of  gold  bullion. 

This  stability  of    the  price  of    gold    bullion  ex- 
pressed in  gold  coin  causes  confusion  in  the  minds 
of  people,   giving  them   the  erroneous  impression 
I  113 


f 


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If 

f  *' 

41 

hi 

m 

if!;  1 
,1  ,      i» 

|rl 

III, 

III 

^ 


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"■>  it 


■if : 


WHY    IS   THE    DOLLAR   SHlUNKINd?    [(  n.  VII. 

tliat  there  is  no  change  in  the  value  of    money. 
Indeed,  this  stabi  ity  has  often  been  eited  to  show 
that  gold  is  a  stable  standard  of  vr.lue.     Dealers  in 
objeits  made  of  gold  seem  to  misunderstand  the 
significance  of  the  fact  that  an  ounce  of  gold  d^ 
fine)  always  costs  SIS.GO  in  the  United  States,  or  an 
ounce  of  gold  CA  6"^')  always  costs  £3:  17*.  iO^d. 
in  England.     This  means  nothing  more  than  the 
fact  tliat  gold  in  one  form  and  measured  in  one  way 
will  always  bear  a  constant  ratio  to  gold  in  another 
form  and  measured  in  another  way.     An  ounce  of 
gold  bullion  is  worth  a  fixed  number  of  gold  dollars 
for  the  same  reason  that  a  pound  sterling  of  gold  is 
worth  a  fixed  inimber  of  gold  dollars,  or  that  a  ton 
of  large  steel  ingots  is  worth  a  fixed  number  of 
pounds  of  small  steel  ingots. 

Except,  then,  for  extremely  slight  and  temporary 
fluctuations,  gold  bullion  and  gold  money  must 
always  have  the  same  value.  Therefore,  in  the 
foUowing  discussion  respecting  the  more  consider- 
able fluctuations  afTecting  both,  we  shall  neak  of 
these  values  interchangeably  as  "the  value  of  gold." 

§  3.  Influence  of  the  Production  and  Consumption 
of  Money  Metals  on  the  Quantity  of  Money 
and  therefore  on  Prices 

The  stock  of  bullion  is  not  the  ultimate  outside 
influence  on  the  quantity  of  money.  As  the  stock 
of  bullion  and  the  stock  of  money  influence  each 
otlier,  so  the  total  stock  of  l)oth  is  itself  influenced 

111 


8  3.]         REMOTK   INFLUKNC'ES   iContinuerD 

by  production  and  consimiptioii.  The  production 
of  gold  consists  in  the  outi)ut  of  the  mines,  which 
constiintly  tends  to  add  to  the  existing  stocks  both 
of  bullion  and  coin.  The  consumption  of  gold  con- 
sists in  the  use  of  bullion  in  the  arts  by  being  wrought 
into  jewelery,  gilding,  etc.,  and  in  losses  of  coin  by 
abrasion,  shipwreck,  etc.  If  we  consider  the  amount 
of  gold  coin  and  bullion  as  a  sort  of  reservoir,  pro- 
duction would  be  the  inflow  from  the  mines,  and 
consumption  the  outflow  to  the  arts  and  by  destruc- 
tion and  loss.  To  the  inflow  from  the  mines  should 
be  added  the  rr-inflow  from  forms  of  art  into  which 
gold  had  previously  been  wrought,  but  which  have 
since  become  obsolete.  This  is  illustrated  by  the 
business  of  producing  gold  bullion  by  burning  gold 
picture-frames. 

We  shall  consider,  first,  the  inflow  or  production, 
and  afterward  the  outflow  or  consumption.  The 
regulator  of  the  inflow  (which  practically  means  the 
production  of  gold  from  the  mines)  is  its  estimated 
cost  of  production.  Wherever  the  estimated  cost 
of  producing  a  dollar  of  gold  is  less  than  the  existing 
value  of  a  dollar  in  gold,  the  gold  will  (normally)  be 
produced.  Wherever  the  cost  of  production  ex- 
ceeds the  existing  value  of  a  dollar,  the  gold  will 
(normally)  not  be  produced.  In  the  former  case 
the  production  of  gold  is  profitable ;  in  the  latter 
it  is  unprofitable. 

This  holds  true  in  whatever  wa\'  cost  of  produc- 
tion is  measured,  whether  in  terms  of  gold  itself,  or 

115 


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t. 
i 


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.     1 


.t  i 


if:' 

1 

'I. 

1 

fii. 

1 

!. 

f* 

P: 

if 

1 

:!' 

i 

fij 

1 

!iil 

1' 

WHY    IS   THE    DOLLAR    SHRINKINH?    [Ci.  VII. 

in  terms  of  some  other  rominodity  sucii  as  wheat, 
or  of  conuiKKlities  in  Reiierai.  In  gold-standard 
conntries  the  gold-miner  does  actnally  reckon  the 
cost  of  producing  gold  in  terms  of  gold.  From  his 
standpoint  it  is  a  needless  complication  to  translate 
the  cost  of  production  and  the  value  of  the  product 
into  some  other  standard  than  gold.  He  is  interested 
in  the  relation  between  the  two,  and  this  relation 
will  be  the  same  whichever  standard  is  employed. 
To  illustrate  how  the  produ'i-r  of  gohl  measures 
everything  in  terms  of  gold,  suppose  that  the  price 
level  rises.  He  will  then  have  to  pay  more  dollars 
for  wages,  machinery,  fuel,  etc.,  while  the  prices 
obtained  for  his  prodiirf  (expressed  in  those  same 
dollars)  will,  as  always,  remain  unchanged.  Con- 
versely, a  fall  in  the  price  level  will  lower  his  cost  of 
production  (measured  in  dollars),  while  the  price  of 
his  product  will  still,  as  always,  remain  the  same. 
Thus  we  have  a  vnriahlr  number  expressing  the  cost 
of  production  and  a  constant  number  expressing  the 
price  of  gold  product. 

If  we  express  the  same  phenomena,  not  in  terms 
of  gold,  but  in  terms  of  wheat,  or  rather,  let  us  say, 
in  terms  of  goods  in  general,  we  shall  have  the  oppo- 
site conditions.  Then  a  fall  in  the  price  level  can- 
not be  said  to  affect  his  cost  of  production  (measured 
in  goods),  while  the  "price,"  or  purchasing  power, 
of  his  product  over  goods  will  rise.  A  rnn.siant  num- 
ber expresses  the  cost  of  gold  and  a  variable  number, 
its  price  (purchasing  power). 

116 


S3)  FtKMOTK    INKLL'EN'CES    iCunttnutd) 


Thus  tlu'  (•unii)aris()ii  lu'twirn  i)ricr  and  cost  of 
I)ro(lu(tioii  is  tlu-  siinif.  wlu'thcr  we  use  jjold  or  otiur 
commodities  as  our  criterion.     In  the  one  view  — 
i.r..  when  prices  of  hd)our  and  comriKxlities  are  meas- 
ured m  j,'old— a  rise  of  these  |)rices  appears  as  a 
rise  in  the  gold-miner's   cost   of    production  —  the 
money  cost  to  him  of  labour  and  materials  — while 
the   price  of  his   product,  gold,  appears  constant; 
in  the  other  view  — /.r.,  when  lahoiir  and  commodi- 
ties are  measured  in  other  goods  —  tin-  same  |)he- 
nomenon  is  expressed  as  a  fall   in  the  purchasing 
power  of  his  product,  gold,  while  the  cost  of  labour 
and  materials  in  terms  of  themsehes  is  the  constant 
quantity.     In  the  one  view  his  costs  rise  relatively 
to  his  product ;    in  the  other  his  product  falls  rela- 
tively to  I  is  costs.     In  either  view  he  will  he  dis- 
couraged.    He  will  look  at  his  troubles  in  the  former 
light,  i.e.,  as  a  rise  in  the  cost  of  jjroduction  ;    but 
we  shall  find  it  more  useful  to  look  at  them  in  the 
latter,  i.e.,  as  a  fall  in  the  purchasing  power  of  the 
product.     In  either  case  the  comparison  is  between 
the  cost  of  the  production  of  gold  and  the  purchas- 
ing  power   of   gold.     If   this   purchasing   power   is 
above  the  cost  of  production  in  any  particular  mine, 
it  will  pay  to  work  that  mine.     If  the  purchasing 
power  of  gold  is  lower  than  the  cost  of  production 
in  any  particular  mine,  it  will  not  pay  to  work  that 
mine. 

So  much  for  the  inflow  of  gold  and  the  conditions 
regulating  it.     We  turn  next  to  outflow  or  consump- 

117 


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If 


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ii 

tp 

;    **• 

f 

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it 

J 

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WilV    IS   TlIK    I)<)LLAI{    snUlNKIN<r.'     (Oc.  Vil 

tiuii  of  ^'old.  This  lias  t\v<.  forms,  vi/. :  consumi)- 
tioii  ill  tlir  arts  and  coiisuiuptioii  for  iiiorirtary 
purposes. 

First.  \vi>  shall  (oiisi<l»T  its  coiisumpti**!!  in  tlu-  arts. 
If  ohjrcts  ina<K'  of  p.hl  art-  chfait.  —  that  is,  if  tlu- 
pricrs  (.f  other  ol)j»'«ts  aw  rt-lativrly  liiK'h,  -  tlu-n 
th.'  n-lativc  chfaimrss  <.f  the  K"l«l  <»l>j«cls  will  lead 
to  increase  in  their  use  and  consumption.  Kxpress- 
inn  the  matter  in  terms  of  money  prices,  when  ])ri(rs 
of  everylhinj;  «lsc  ure  hi-rher  and  people's  incomes 
are  likewi>e  hi^iher.  while  p)ld-leaf  and  ^ohl  orna- 
iiunts  ninain  at  their  old  prices.  i)eople  will  use 
und  consume  more  ^;old-leaf  and  ornaments. 

Thest'  are  instances  of  the  coiisumj)tion  of  ^'<>1J 
in  the  form  of  comni<.dities.  The  consumption  and 
loss  of  ^'old  as  coin  is  a  matter  of  "abrasion"  (i;radual 
waste  by  wearing'  or  ruhhint:  aKMinst  other  coins  or 
the  hands,  i)ocket,  or  purse),  of  loss  by  shipwreck 
mid  other  accidents.  They  chant,'c  with  the  chanjies 
in  the  amount  of  j,'uld  in  use  and  in  its  rapidity  ot 

ex(han},'e. 

A  fall,  therefore,  in  purchasin«  power  of  the  value 
of  ptid  atVects  both  consumption  and  prodnction.      It 
stimulates  consumption  (tliat  is.  the  turning  «>f  bul- 
lion into  articles  of  coiiuiurce);    and  it  discouraj:;es 
production.     .\n   increase  of   purciiasin^   power,   of 
course,    acts    in    the    oppo>ite    way.     Conversely, 
consumption     aiul     production     allVct     purcliusuiK 
power.     Consumption,  or  the  witlulrawal  of  bullion 
:.,*,.    ...  ..,,,w.r,...     rii^f .<    the    tiiir<hasinir    Dower    of 

118 


};{|  UE.MOTH    INI'LIKNCKS   .Contuntrff) 

\vli:i.t  is  left,  while  pnxluctitui  from  t'lc  iniiics  lowers 
tilt'  piircliasiii;:  jtowcr. 

Tlie  purclia^iii^!;  power  of  tiii>iicy.  liciii^  thus 
phiyed  upon  l»y  o|)posiii^;  forc<s  of  |)ro(hi('tioii  and 
consumption,  is  driven  up  or  (h)\vn  a>  tiie  case  uiuy 

he. 

We  have  now  discussed  all  hut  one  if  the 
important  outside  infhirnc  -,  upon  the  e<iUiition  of 
exchanjie.  That  one  is  the  ciiaraeter  of  the  monetary 
and  hanking  system  whidi  all'ects  the  (piantity  of 
money  and  deposits.  This  we  re^ervt-  for  special 
discussion  in  tlie  following  chapter. 

Meanwhile,  we  may  note  that   almost  all  of  tlic 
infhu'nces  which  at  the  i)rcscnt  time  actually  affect 
either  the  (piantity  or  the  velocities  of  circulation 
have  hecn  and  arc  predominantly  in  the  direction 
of   hijjher    i)rici-s.     Almo-t    the   only    opjjosin^   in- 
fluence is  the  increased  volume  of  trade.     We  ma\' 
also  point  out  that   some  of  thoM-   influences  dis- 
cussed in  this  and    the  i)recedin<i  chapter  operate 
///    niorv    tlidii    one    irnji.     Consider,    for    instance, 
technical    knowledj^c    and    invention,    which    affect 
the  equation  of  exchange  hy  incrcasinf:  trade.     S(» 
far   as    these   increase    trade,    the    tendency   is    to 
decrease  |)rices;  hut  so  far  as  the>   dcveloj)  metal- 
lurgy   and     the    other    arts    which     increase    the 
[production     and     transportation    of    the    precious 
metals,  they  tend  to  invrcaxc  prices.       So    far    as 
they  make  the   transportation   and    circuhition    of 
money   and    deposits   (piicker,   they    also         id    to 

111) 


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im-:.^^ 


WHY   IS  THE   DOLLAR  SHRINKINO?    [Ch.  VIL 

increase  prices.  So  far  as  they  lead  to  the 
development  of  the  art  of  banking,  they  likewise 
tend  to  increase  prices  both  by  increasing  deposit 
currency  {M')  and  by  increasing  the  velocity  of 
circulation  of  both  money  and  deposits.  So  far  as 
they  lead  to  the  concentration  of  population  in 
cities,  they  tend  to  increase  prices  by  accelerating 
circulation. 


120 


,}  t 


CHAPTER    Vin 


i 


OPERATION  OF  MONETARY  SYSTEMS 

§  1.  Gresham's  Law 

Thus  far  we  have  considered  the  influences  which 
determine  the  purchasing  power  of  money  when  the 
money  in  circulation  is  all  of  one  kind.  We  have 
now  to  consider  the  monetary  systems  in  which  two 
or  more  kinds  of  money  are  used. 

One  of  the  first  difficulties  in  the  early  history  of 
money  was  that  of  keeping  two  or  more  metals  in 
circulation  at  the  same  time.  The  monetary  unit 
in  one  of  the  two  would  become  cheaper  than  in  the 
other,  and  the  cheaper  would  drive  out  the  dearer. 

To  this  tendency  has  been  given  the  name  of 
"Gresham's  Law"  in  honour  (rather  undeservedly) 
of  Sir  Thomas  Gresham,  a  financial  adviser  of 
Queen  Elizabeth.  He  called  attention  to  the 
tendency  in  the  middle  of  the  sixteenth  century, 
although  it  is  now  known  that  many  others  had 
anticipated  him.  In  fact,  the  Law  seems  to  have 
been  recognized  among  the  ancient  Greeks.  It  is 
mentioned  in  the  "Frogs"  of  Aristophanes:  — 

"  For  your  old  and  standard   pieces,  valued  and  ap- 
proved and  tried, 
Here  among  the  Grecian  nations  and  in  all  the  world 
beside, 

121 


liif 
I 


i 


f 


ill  if" 


WHY   IS  THE   DOLLAR   SHRINKING?    [Ch.  VIII. 


I   i 


A-  i 


Recognized  in  every  realm  for  trusty  stamp  and  pure 
essay, 

Are  rejected  and  abandoned  for  the  trash  of  yester- 
day; 

For  a  vile,  adulterate  issue,  drossy,  counterfeit,  and 
base 

Which  the  traffic  of  the  city  passes  current  in  their 
place!" 

Gresham's  Law  is  ordinarily  stated  in  the  form, 
"bad  money  drives  out  good  money,"  for  it  has 
usually  been  observed  that  the  badly  worn,  defaced, 
light-weight,  "clipped,"  "sweated,"  and  otherwise 
deteriorated  money  tends  to  drive  out  full-weight, 
freshly  minted  coins.  This  formulation,  however, 
is  not  accurate.  "Bad"  coins,  e.g.,  worn,  bent, 
defaced,  or  even  "  clipped  "  coins,  will  drive  out  other 
money  only  so  far  as  they  are  less  valuable.  Some- 
times bright  freshly  minted  coins  drive  out  old,  dull, 
defaced  coins,  as,  for  instance,  when  new  gold  drove 
out  silver  from  the  United  States  after  1837,  the  new 
gold  dollar  being  cheaper  than  the  old  silver  dollar. 
Accurately  stated,  the  Law  is  simply :  The  cheaper 
money  tends  to  drive  oid  the  dearer. 

A  good  example  of  Gresham's  Law  as  applied  to 
gold  and  silver  is  foiuid  in  the  history  of  Japan. 
When  the  treaty  of  ISo.S  between  Great  Britain  and 
Japan  was  adopted,  an  ounce  of  gold  was  worth  in 
Japan  only  4|  ounces  of  silver,  whereas  in  Europe 
it  was  worth  15^  ounces,  or  3.]  times  as  much. 
The  result  was  that  the  first  merchants  who  entered 

122 


§  1.1    OPERATION  OF  MONETARY  SYSTEMS 

Japan  from  Europe  could  make  a  large  profit  by 
trading  in  gold  and  silver.  By  taking,  say,  4|  ounces 
of  silver  to  Japan  they  could  buy  an  ounce  of  gold, 
and  taking  this  ounce  of  gold  back  to  Europe  they 
could  obtain  15|  ounces  of  silver  for  it,  or  more  than 
three  times  as  n-uch  as  they  started  with.  So 
silver  flowed  into  Japan  and  gold  flowed  out. 

The  reason  why  the  cheaper  of  two  moneys 
always  prevails  is  that  the  choice  of  the  use  of 
money  rests  chiefly  with  the  man  who  gives  it  in 
exchange,  not  with  the  man  who  receives  it.  When 
any  one  has  the  choice  of  paying  his  debts  in  either 
of  two  moneys,  motives  of  economy  will  evidently 
prompt  him  to  use  the  cheaper.  If  the  initiative 
and  choice  lay  principally  with  the  person  who 
receives  instead  of  the  person  who  pays  the  money, 
the  opposite  would  hold  true.  The  dearer  or  "  good  " 
money  would  then  drive  out  the  cheaper  or  "bad" 
money.  It  is  because  the  payer  of  money  exercises 
the  choice  that  the  cheaper  money  tends  to  be  passed 
on  and  the  dearer  money  to  be  withdrawn. 

Any  individual  into  whose  hands  the  two  moneys 
may  chance  to  fall  may  exercise  this  choice  and 
withdraw  the  newly  minted  coins.  But  there  are 
two  classes  especially  interested  and  most  instru- 
mental in  w'thdrawing  the  "good"  money  from 
circulation ;  namely,  those  who  wish  it  either  for 
export  or  for  melting,  —  the  bankers  and  the  gold- 
smiths. 

What,  then,  becomes  of  the  dearer  money  ?  It  may 

123 


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1     !!"  (I 

r       li 


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m, 


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Mi 


WHY    IS   THE    DOLLAR   SHRINKING?    [Ch.  VIII. 


If" 


be  hoarded  or  go  into  the  melting-pot  or  go  abroad  — 
hoarded  and  meJted  from  motives  of  economy,  and 
sent  abroad  because,  where  foreign  trade  is  involved, 
it  is  the  foreigner  receiving  the  money,  rather  than 
ourselves  giving  it,  who  dictates  what  kind  of  money 
shall  be  accepted.  He  will  take  only  the  best, 
because  our  legal  tender  laws  do  not  bind  him. 

Until  "milHng"  ^  the  edges  of  coins  was  invented, 
and  a  "Hmit  of  tolerance"  -  of  the  mint  was  adopted, 
much  embarrassment  was  felt  in  commerce  from  the 
fact  that  the  "  clipping  "  and  debasing  of  coins  was  a 
common  practice.  Nowadays,  however,  any  coin 
which  has  been  so  "sweated"  or  "clipped  "  as  to 
reduce  its  weight  appreciably  ceases  to  be  legal 
tender,  and  being  conmionly  rejected  by  those  to 
whom  it  is  offered,  cerses  to  be  money.  Within  the 
customary  or  legal  limits  of  tolerance,  however,  — 
that  is,  as  long  as  the  cheaper  money  continues  to  be 
money,  —  it  will  tend  to  drive  out  the  dearer. 


§  2.  Bimetallism 

The  obvious  effect  of  Gresham's  Law  is  to  de- 
crease the  purchasing  power  of  money  at  every 
opportunity.  The  history  of  the  world's  currencies 
is  largely  a  record  of  money  debasements,  often  at 

>  Making  the  edges  finely  corrugated  so  that  they  can- 
not be  filed  or  otherwise  rubbed  off  without  detection. 

2  The  allowable  deviation  from  the  statutory  weight. 
If  the  deviation  exeet'ds  this,  the  coin  is  rendered  un- 
acceptable in  law  as  !  iral  tender, 

124 


§  21     OPERATION   OF   MONETARY   SYSTEMS 

the  behest  of  the  sovereign.  Our  chief  purpose  now, 
in  considering  Gresham's  Law,  is  to  formulate  more 
fully  the  causes  determining  the  purchasing  power  of 
money  under  monetary  systems  subject  to  the 
operation  of  Gresham's  Law.  One  application 
is  to  "bimetallism."  Lender  bimetallism,  govern- 
ments open  their  mints  to  the  free  coinage  of  two 
metals  (usually  gold  and  silver)  at  a  fixed  coinage 
ratio,  and  make  both  sorts  of  coin  unlimited  legal 
tender  at  that  ratio.'  Under  this  .system  the  debtor 
has  the  option,  unless  otherwise  bound  by  contract, 
of  making  the  payment  either  in  gold  or  silver  money. 
These,  in  fact,  are  the  two  requisites  of  complete 
bimetallism,  \'iz. :  — 

(1)  The  free  and  unlimited  coinage  of  both  metals  at 
a  fixed  ratio. 

(2)  The  unlimited  legal  tender  of  each  metal  at  that 
ratio. 

The  object  of  bimetallism  is  to  render  the  pur- 
chasing power  of  money  more  stable.  It  has  been 
denied  that  bimetallism  ever  did  or  can  make  gold 
and  silver  dollars  circulate  side  by  side  at  equal 
values.  This  denial  is  based  on  Gresham's  Law,  by 
which  the  cheaper  metal  will  drive  out  the  dearer. 
Our  first  task  is  to  show,  quite  irrespective  of  its 

'  By  the  "coinage  ratio  "  is  moant  the  ratio  of  the  weight 

of  the  silver  dollar  to  that  of  the  gold  dollar.     This  is  at 

present  16  to  1 ;    for  a  silver  dollar  weighs  412i  grains, 

which  is  almost  exactly  sixteen  times  the  weight  of  a  gold 

ollar  of  25.8  grains. 

125  - 


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if 


#<* 


WHY    IS  THE    DOLLAR   SHRINKING?    [Ch.  VIII. 

desirability,  that  bimetallism  can  "work"  and  has 
worked  under  certain  circumstances,  but  not  under 
others. 

Suppose  that,  at  first,  gold  alone  is  freely  coined 
(and  is  unlimited  legal  tender)  and  then  (as  proposed 
in  the  United  States  by  the  "free  silver"  party  in 
189G  and  19(K))  silver  is  put  on  exactly  the  same  basis, 
the  mints  being  opened  to  its  free  coinage  also. 

The  results  of  thus  opening  the  mints  to  silver  at 
a  ratio  of  IG  to  I  with  gold  will  be  different,  according 
to  the  relative  viarkri  value  of  gold  and  silver  before 
the  mints  are  opened.  If  412.]  grains  of  silver  were 
dearer  than  25.8  grains  of  gold,  there  would  be  no 
silver  coined  at  all,  for  no  one  will  take  412|~  grains 
of  silver  to  be  coined  and  used  as  a  dollar  of  money 
when  he  can  get  more  than  a  gold  dollar  for  it  by 
selhng  it  as  silver  bullion. 

But  if  (as  happens  to  be  the  case  to-day)  412^ 
grains  of  silver  are  cheaper  than  25.8  grains  of  gold, 
every  owner  of  silver  bullion  will  make  a  profit  by 
taking  it  to  the  mint.  In  this  way  he  can  get  a 
silver  dollar  for  every  412.]  grains  of  silver  bullion, 
while  in  the  silver  bullion  market  he  can  get  only, 
let  us  say,  fifty  cents.  The  result  will  be  a  wild 
scramble  among  all  owners  of  silver  bullion  to  get  it 
coined,  in  order  to  transform  each  412]  grains  of  it 
into  a  full-fledged  dollar  instead  of  fifty  cents,  which 
prexnously  was  all  they  could  get  for  it.  It  is 
true  tiiat  the  new  silver  dollar  may  not  be  worth  as 
much  in  purchasing  power  as  a  gold  dollar ;  but  being 

126 


S  2.1    OPERATION  OF  MONETARY  SYSTEMS 


legal  tender,  it  will  have  just  as  great  (lebt-pa>ing 
power. 

There  can  be  no  doubt,  then,  that  silver,  being 
cheaper  than  gold,  will  be  taken  to  the  mint  as  soon 
as  the  bimetallic  law  takes  effect.  The  question 
now  is,  What  will  be  the  result  ?  To  this  question 
the  answer  is  briefly  as  follows :  — 

I.  The  first  effect  (as  has  been  emphasized  by 
"monometallists")  will  be  the  operation  of  Gresham's 
Law,  by  which  the  cheap  silver  dollars  will  tend  to 
expel  the  dear  gold  dollars  from  circulation. 

II.  But  (as  emphasized  by  "bimetallists")  this 
very  operation  of  Gresham's  Law  is  self-limiting; 
for  it  tends  to  reduce  the  original  disparity  between 
the  values  of  the  gold  and  silver  dollars.  Owing 
to  the  eagerness  of  debtors  to  use  silver  instead  of 
gold  in  paying  their  debts,  the  value  of  silver  is  in- 
creased and  that  of  gold  decreased.  This  mutual 
approach  of  the  values  of  gold  and  silver  dollars  may 
result  in  making  them  equal  and  if  they  ber  raie 
equal  before  gold  is  entirely  expelled  from  circula- 
tion, we  shall  have  both  metals  in  concurrent  cir- 
culation at  par. 

III.  But  (as  pointed  out  by  the  "monometal- 
lists")  the  next  result  will  be  a  great  stimulus  to  the 
minting  of  silver  and  a  great  discouragement  to  the 
mining  of  gold.  Consequently,  silver  will  gradually 
become  more  plentiful,  and  therefore  cheaper  again, 
and  gold  scarcer,  and  therefore  dearer  again.  Con- 
sequently, silver  will  again  tend  to  expel  gold. 

127 


!  !• 

I,;, 

ii 


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'it 

»^ 

i< 
•  s 

Hi. 


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M 


II: 


.f 


WHY    IS  THE    DOLLAR   SHRINKING?    [Cii.  VIII. 


,-   * 


-f 


!:' 


IV.  But  (as  insisted  by  "binietallists")  this 
increase  of  the  stock  of  silver  (coin  and  buUion) 
and  decrease  of  the  stock  of  gold  are  also  self- 
limiting  ;  for  the  increased  production  of  silver  will 
be  checked  by  increased  cost  of  production,  and  con- 
sumption will  tend  to  overtake  i)roduction,  while 
the  opposite  adjustments  apply  to  gold.  The  result 
may  be  the  concurrent  circulation  of  both  metals 
or  it  may  be  the  expulsion  of  one  of  them  from  cir- 
culation. All  depends  on  the  quantities  produced. 
If  one  of  the  metals  is  produced  in  superabundance 
beyond  a  certain  limit,  it  will  completely  displace 
the  other.  Bimetallism  is  thus  possible  only  within 
limits,  and  there  is  always  a  chance,  amounting 
in  the  long  run  to  a  certainty,  that  the  system  will 
breakdown. 

We  may  now  illustrate,  by  historical  examples, 
the  principles  just  explained.  The  first  and  most 
important  case  is  that  of  France.  The  ratio  of 
lo|  to  1  was  adopted  by  France  in  1785,  and  con- 
tinued by  the  law  of  1803.  The  history  of  France 
and  the  Latin  Union  during  the  period  from  1785, 
and  especially  from  1803,  to  1873  is  instructive. 
It  affords  a  practical  illustration  of  the  theory  that 
when  conditions  are  favourable,  gold  and  silver  can  be 
kept  tied  together  for  a  considerable  period  by  means 
of  bimetallism.  During  this  period  the  public  was 
ordinarily  unconscious  of  any  disparity  of  value, 
and  only  observed  the  changes  from  the  relative  pre- 
dominance of  gold  to  the  relative  predominance  of 

128 


{  2.]    OPERATION  OF  MONETARY  SYSTEMS 


silver  in  the  currency  and  vice  versa.  In  the  whole- 
sale bullion  market,  it  is  true,  there  were  slight 
variations  from  the  ratio  of  15^  to  1 .  But  such  varia- 
tions simply  supplied  the  force  to  restore  equilibrium. 

Vnmi  180;?  until  about  \H'-A)  the  tendency  was 
for  silver  to  displace  gold.  In  this  period  there  was 
a  net  export  of  gold. 

By  ISoO  the  process  had  practically  reachetl  its 
limit.  Bimetallism  would  have  broken  down  and 
resulted  in  silver  monometallism  then  and  there, 
except  for  the  fact  that,  as  though  to  save  the  day, 
gold  had  just  been  discovered  in  California.  The 
consequence  of  the  new  antl  increased  gold  produc- 
tion was  a  reverse  movement,  an  inflow  of  gold  into 
the  French  currency,  and  an  outflow  of  silver. 
From  1848  to  1870,  inclusive,  the  net  importation 
of  gold  amounted  to  .'>,  15.'?, 000,000  francs,  or  over 
224,(XX),(M)0  francs  a  year,  while  the  net  exportation 
of  silver  from  1852  to  18()4,  inclusive,  amounted  to 
1,726,000,0(K)  francs,  (.r  nearly  133,000,000  francs 
a  year.  Gold  was  displacing  silver  and  filling  the 
currency.  It  seemed  probable  that  France  would  be 
entirely  drained  of  silver  currency  and  come  to  a 
gold  basis.  But  the  gold  mines  were  gradually 
exhausted,  while  silver  production  increased,  with 
the  consequence  that  there  was  again  a  reversal  of 
the  movement.  Silver  gradually  pushed  gold  out 
of  circulation  and,  had  not  France  and  the  other 
countries  of  the  Latin  Union  successively  suspended 
the  free  coinage  of  silver  in  1873-1878,  they  would 
K  129 


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if 


Li 

J! 
I  it 

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I; 

r. 
f  i     !1 


^11 


WHY    IH  THK    DOLLAR   SFIRINKINd?    [Ch.  VIIL 


If 


1    i  .. 


have  found  tlictnsclvi's  on  a  silver,  instciul  of  ii  Rold, 
basis.  It  has  been  claimed  by  biinetallists  that  this 
aetioii  ill  demonetizing  silver  was  itself  the  eause 
of  the  breakdown.  The  truth  is.  that  the  breakdown 
was  the  eause  of  demonetization,  althouj^h  de- 
monetization, by  keeping  baek  silver  from  eircula- 
tion  and  keeping;  gold  in  eireulation,  did  operate 
to  widen  the  breach  already  made. 

The  Latin  Union  might  conceivably  have  main- 
tained bimetalhsm  longer  if  other  countries  had 
joined  with  them.  But  it  had  to  absorb,  not  only 
much  of  the  silver  provided  by  the  mines,  but  also 
a  considerable  amount  which  had  previously  formed 
part  of  the  monetary  stcok  of  Germany,  and  which, 
at  the  adoption  of  the  gold  standard  by  that  country 
fcillowing  the  Franco-Prussian  War,  was  thrown  on 
the  market.  That  is,  not  only  the  silver  mines,  but 
countries  demonetizing  silver,  dmnped  silver  on  the 
Latin  Union.  Add  to  this  the  movement  toward 
the  gold  standard  in  Scandinavia  and  the  United 
States,  and  it  becomes  evident  that  the  obstacles 
were  many,  for  a  union  comprising  so  few,  and  mostly 
unimportant  states. 

§  3.  The  "  Limping  "  Standard 

Bimetallism  is  to-day  a  subject  of  historical 
interest  only.  It  is  no  longer  practised;  but  its 
former  prevalence  has  left  behind  it  in  many  coun- 
tries, including  France  and  the  United  States,  a 
monetary   system   which   is   sometimes  called   the 

130 


13)  ()P?:ration  op^  monkt.vrv  systems 


"limpinjj"  or  "nnc-IcKKf'l"  staiidarfl.  Such  a 
system  comes  about  when,  in  a  system  of  bimetal- 
lism, before  either  metal  can  wholly  expel  tlie  other, 
the  mint  is  closed  to  the  cheaper  of  them,  but  the 
coinage  that  has  been  accomplislied  up  to  date  is 
not  recalled.  Suppose  sihc  t()  be  the  metal  thus 
excluded  — as  in  France  and  the  I'nited  States. 
Any  money  of  that  metal  already  cdined  and  in 
circulation  is  kept  in  circulation  at  par  with  gold. 
This  parity  may  contimie,  even  if  limitrd  additional 
amounts  of  silver  be  coined  from  time  to  time. 
There  will  then  result  a  dilFercnce  in  value  between 
bullion  and  silver  coin,  the  silver  coin  being  over- 
valued. In  short,  we  thus  have  a  gold  standard  with 
silver  token  money. 

In  the  case  just  discussed,  the  value  of  the  coined 
silver  will  be  equal  to  the  value  of  gold  at  the  legal 
r.itio.  Precisely  the  same  i)rinciple  ai)plies  in  the  case 
of  any  money  the  value  of  which  as  money  is  greater 
than  the  value  of  its  constituent  material.  Take 
the  case,  for  instance,  of  paper  money.  So  long  as  it 
has  the  distinctive  character  of  money  —  general 
acceptability  at  its  legal  value  —  and  is  limited  in 
quantity,  its  value  will  ordinarily  be  equal  to  that 
of  its  legal  equivalent  in  gold.  If  its  quantity 
increases  indefinitely,  it  will  gradually  push  out  the 
gold  until  there  is  no  gold  left.  Likewise,  credit 
money  and  credit  in  the  form  of  bank  deposits  would 
have  this  effect.  To  the  extent  that  they  are  used, 
they  lessen  the  need  for  gold  in  circulation. 

131 


n 


i 


jll 


1 


'-.Jit 


it 


r" 


r   \, 


f 


VVFrV    IS   TFIK    nOLLAIt    SHRINKIMO  '    [C.  \IU. 

So  Imii^;  as  tin-  (luaiitity  «)f  silver  or  other  token 
money,  e.g.,  paper  money,  is  too  small  to  displace 
gold  completely,  ^old  will  contiruie  in  circniation. 
The  value  of  other  money  in  this  case  cannot  fall 
below  that  of  p)ld.  For  if  it  should,  it  would, 
by  (Iresham's  Law.  dis[)lace  jjold  ;  we  are  assuming 
that  it  is  not  of  sufficient  (luantity  to  produce  this 
effect. 

The   parit\-   Iwtween   silver  coin   and   gold   coin, 
und«'r   this    "limping"   standard    is,   therefore,   not 
necessarily  dependent  on  any  redeemability  in  gold, 
but  may  result  merely  from  limitation  on  the  amount 
of  silver  coin.     Such  limitation  is  usually  sufficient 
to  maintain  parity,  despite  irredecmability.     Thi.s 
is  not  always  true,  however;   for  if  for  any  reason 
(such  as  its  novel'/  and  strangeness,  or  rumours  of 
further  inflation)  the  people  should  not  have  con- 
fidence in  some  form  of  irredeemable  paper  or  token 
money,  even  though  it  were  not  overissued,  it  would 
depreciate  and  be  nearly  as  cheap  in  money  form  as 
it  is  in  the  raw  state.     It  might  even  be  so  com- 
pletely rejected  that  it  would  cease  to  circulate  and 
cease  to  be  money.    A  man  is  willing  to  accept  money 
at  its  face  value  so  long  as  he   has  confidence  that 
every  one  else  is  ready  to  do  the  same.     But  it  is 
possible,  for  instance,  for  a  mere  frar  of  overissue  to 
destroy   this   confidence.     The   payee,    who   under 
ordinary  circumstances  submits  patiently  to  what- 
ever money  is  a  customa'     or  legal  tender,  may  then 
take  a  hand  and  insist  on  "contracting  out"  of  the 

132 


I  3.)    OPERATION   OF   MON'ETAUY   SYSTEMS 


offending  standard.  That  is,  lu>  may  insist  on  mak- 
ing all  hi.s  fnturt'  contracts  in  terms  of  the  better 
metal — gold,  for  instance  —  and  thus  contrihut.'  to 
the  further  dowi  "all  in  vr.lue  of  the  deprecialid 
paper,  or  he  may  resort  to  barter  or  even  cease  to 
engage  in  commercial  contracts  altogether. 

Irredi'cmable  j)aper  moiu'y,  then,  like  our  irre- 
deemable silver  dollars,  may  circulate  at  par  u.th 
other  money  if  limited  in  (piantity  and  not  too  un- 
popular. If  it  is  gradually  increased  in  amount,  such 
irredeemable  money  may  expel  all  metalli<  money 
and  be  left  in  un(li>p\itcd  possession  of  the  field. 

Jevons  said:  "There  is  i)lcnty  of  evidence  to 
prove  that  an  inconvertible  paper  money,  if  care- 
fully limited  in  quantity,  can  retain  its  full  value. 
Such  was  the  case  with  the  Hank  of  England  notes 
for  several  years  after  the  suspension  of  specie 
payments  in  17!)7,  and  such  is  the  case  with  the 
present  [iST.')]  notes  of  the  Hank  of  France."  Hut 
Jevons  observes  that  all  irredeemable  paper  money 
started  as  redeemal)le.  lie  adds  that  habit  may 
do  much  to  keep  money  in  circulation  when  if  ii  once 
started,  "but  it  is  doubtful  whether  the  most  power- 
ful government  could  oblige  its  sul)jects  to  accept 
and  circulate  as  money  a  worthless  substance 
which  they  had  no  other  motive  for  receiving." 

Irredeemable  money  has  always  had  a  fascination 
for  many  people.  But  it  has  never  proved  desirable. 
It  is  a  constant  temptation  toward  abuse,  causes 
business  distrust,  discourages  long-time  contracts, 

133 


i 


%m: 


WHY   IS  THE    DOLLAR  SHRINKING?    [Ch.  VIII. 

and  has  almost  invariably  proved  a  veritable  curse 
to  the  country  employing  it.  While,  therefore, 
redeemability  is  not  absolutely  essential  to  produce 
parity  of  value  with  the  primary  money,  it  is  practi- 
cally a  wise  precaution. 

The  lack  of  redeemability  of  silver  dollars  in  the 
United  States  is  one  of  the  chief  defects  in  our 
unsatisfactory  monetary  system  Our  paper  silver 
certificates  are  redeemable  in  silver  dollars,  but  these 
silver  dollars  are  not  redeemable  in  gold.  The 
absurdity  of  the  situation  consists  in  the  fiction  that 
somehow  the  redemption  of  the  silver  certificates  in 
silver  dollars  keeps  them  both  at  par  wit!  'rold. 
The  truth  is  that  the  paper  would  keep  its  parity 
with  gold  just  as  well  if  there  were  no  redemption  in 
silver.  A  silver  dollar  as  silver  is  worth  less  than  a 
gold  dollar  just  as  truly  as  a  paper  dollar  as  paper 
is  worth  less  than  a  "old  dollar.  The  fact  that  the 
silver  is  worth  half  a  dollar,  while  the  paper  is  worth 
only  a  fraction  of  a  cent,  will  not  avail  in  the  least 
to  make  either  the  silver  or  the  paper  worth  a  whole 
dollar.  A  pillar  reaching  halfway  to  the  ceiling 
cannot  hold  the  ceiling  up  any  more  than  a  pillar 
an  inch  high.  The  silver  certificates  and  dollars 
keep  at  par  with  gold  merely  because  they  are  not 
sufficient  in  quantity  to  displace  gold.  If  their  quan- 
tity should  ever  be  made  great  enough,  they  would 
displace  gold  and  depreciate ;  and  the  redeemability 
of  one  of  them  in  the  other  could  not  avail  to  prevent 
such  depreciation. 

134 


W^ 


Jil 


S  3]    OPERATION  OP  MONETARY  SYSTEMS 


Very  much  the  same  thinj;  is  tru.^  of  the  United 
States  notes  or  "greenbacks."  These  are  only 
nominally  redeemable  ;  for  as  soon  as  redeemed  they 
must  be  reissued.  The  essence  and  virtue  of  re- 
demption is  retirement,  and  without  retirement 
redemption  is  a  mockery.  The  requirement  that  the 
greenback  must  never  be  retire(i  permits  no  contrac- 
tion. The  result  is  that  when  contraction  becomes 
necessary,  it  occurs  by  the  export  of  sold.  In  1S93, 
when  a  forced  expansion  of  silver  certificates  and 
"treasury  notes"  was  in  progress,  the  greenbacks 
acted,  as  President  Cleveland  said,  as  an  "endless 
chain."  Their  redemption  drew  gold  out  of  the 
treasury  for  export,  and  their  reissue  led  to  a  repe- 
tition of  this  operation  until  enough  gold  overflowed 
to  make  room  for  the  new  silver  certificates  and 
treasury  notes.  The  process  was  only  ended  by 
repealing  the  law  requiring  silver  inflation. 


J 


1.3.') 


t 


CHAPTER  IX 


■J 


:  .! 


f  ■  t 


:"f 


CONCLUDING   DISCUSSION    OF    PRINCIPLES 

§  1.  Can  "  Other  Things  Remain  Equal  "? 

The  chief  purpose  of  the  preceding  eight  chapters 
is  to  set  forth  the  causes  determining  the  purchasing 
power  of  money.  This  purchasing  power  has  been 
studied  as  the  effect  of  five  and  only  five  causes. 
These  fall  naturally  into  three  groups.  These 
three  groups  are  (1)  circulating  media,  (2)  their 
velocity,  and  (3)  the  volume  of  trade  for  which  they 
are  circulated.  These  and  their  effect,  i.e.,  the  price 
level,  are,  we  saw,  connected  by  a  a  equation  of  ex- 
change, MV  +  M'V  =  PT.  The  three  causes,  in 
turn,  we  found  to  be  themselves  effects  of  antecedent 
causes  lying  entirely  outside  of  the  equation  of  ex- 
change. To  be  specific,  we  sawthat  (1)  the  volume  of 
trade  will  be  increased,  and  therefore  the  price  level 
correspondingly  decreased,  by  the  differentiation  of 
human  wants,  by  diversification  of  industry,  and  by 
facilitation  of  communication ;  (2)  the  velocities  of 
circulation  will  be  increased,  and  therefore  the  price 
level  increased,  by  improvident  habits,  diminution 
of  hoarding  by  the  use  of  book  credit,  and  by  ra])id 
transportation ;  (3)  the  quantity  of  money  will  be 
increased,  and  therefore  the  price  level  increased, 

136 


§  11 


DISCUSSION   OP   PRINCIPLES 


by  the  import  and  minting  of  money,  and,  antece- 
dently, by  the  mining  of  the  money  metal,  by  the 
introduction  of  another  and  initially  cheaper  money 
metal  through  bimetallism,  and  by  the  issue  of 
bank-notes  and  other  paper  money  ;  (4)  the  quantity 
of  deposits  will  be  increased,  and  therefore  the  price 
level  increased,  by  extension  of  the  banking  system 
and  by  the  use  of  book  credit.  The  reverse  causes 
produce,  of  course,  reverse  effects. 

Thus,  behind  the  three  sets  of  causes  which  alone 
affect  the  purchasing  power  of  money,  we  find  over 
a  dozen  antecedent  causes.  If  we  chose  to  pursue 
the  inquiry  to  still  remoter  stages,  the  number  of 
causes  would  be  found  to  increase  at  each  stage  in 
much  the  same  way  as  the  number  of  one's  ancestors 
increases  with  each  generation  into  the  past.  In  the 
last  analysis  myriads  of  factors  play  upon  the  pur- 
chasing power  of  money ;  but  it  would  be  neither 
feasible  nor  profitable  to  catalogue  them.  The 
value  of  our  analysis  consists  rather  in  simplifying 
the  problem  by  setting  forth  clearly  the  three  proxi- 
mate causes  through  which  all  others  whatsoever 
must  operate.  At  the  close  of  our  study,  as  at  the 
beginning,  stands  forth  the  equation  of  exchange 
as  the  great  determinant  of  the  purchasing  ])ower 
of  money.  With  its  aid  we  see  that  normally  the 
quantity  of  deposit  currency  varies  directly  with  the 
ijuantity  of  money,  and  that  therefore  the  'ntroduc- 
tion  of  deposits  does  not  disturb  the  relations  found 
to  hold  true  before.     That  is,  it  is  still  true  that  (1) 

137 


1 


WHY    IS   TITE    DOLLAR   SHRINKING?    [Cu.  IX. 


I 


I 


■il 


■» 


-^    I 


iu^fs 


prices  vary  directly  as  tli(>  quantity  of  money,  pro- 
vided the  volume  of  trade  and  the  velocities  of 
circulation  remain  unchanged ;  (2)  that  prices  vary 
directly  as  the  velocities  of  circulation  of  money 
and  deposits  (if  these  two  velocities  vary  together), 
providi'd  the  quantity  of  money  (and  therefore  ac- 
cording to  our  assumption,  deposits)  and  the  volume 
of  trade  remain  unchanged;  and  (3)  that  prices 
vary  inversely  as  the  volume  of  trade,  provided 
the  quantity  of  money  (and  therefore  deposits) 
as  well  as  the  velocities  of  circulation  remain  un- 
changed. 

But  the  question  now  arises  —  can  the  factors 
supposed  to  "remain  unchanged"  in  these  three 
cases  actr.ally  remain  unchanged  ?  To  this  question 
the  answer  is,  "  Yes,  with  one  exception."  A  change 
in  the  volume  of  trade  ptT  capita  probably  affects, 
besides  prices,  the  velocities  of  circulation,  so  that 
these  velocities  cannot  "remain  unchanged."  At  a 
given  price  level,  the  greater  the  per  capita  trade, 
the  more  rapid  is  the  individual  turnover. 

Practical  evidence  and  illustration  of  this  is  found 
by  examining  the  cash  accounts  of  113  Yale  students, 
who  kept  each  for  one  month  a  careful  record  of  the 
average  cash  in  the  pocl^et  and  the  daily  expendi- 
tures. It  was  found  that  those  who  exi)ended  less 
than  SHOO  a  year  kept,  on  the  average,  in  the 
l)ocket  S.S.()0,  and  spent  at  the  rate  of  8367  per 
annum,  thus  having  a  turnover  of  s.^,  or  43  times 
a   year,   while   those   who   expended   over   SOOO  a 

138 


§  11 


DISCUSSION   OP   PRINCIPLES 


year  carried  an  average  cash  balance  of  $12.70,  and 
spent  at  the  rate  of  §1175  a  year,  making  a  turn- 
over of  liro  or  9;}  times  a  year.  This  shows  that 
the  latter  class  averages  three  times  as  great  an 
expenditure  as  the  former,  but  carried  only  50  per 
cent  more  cash  in  the  ])ocket,  and,  in  consequence, 
had  a  velocity  of  circulation  of  money  more  than 
twice  as  great.  In  fact,  classifying  the  students 
more  miiuitdy  into  five  groups,  namely :  (1)  those 
expending  less  than  SoOO  a  year ;  (2)  those  over  $300 
and  under  SrHM) ;  (;i)  those  over  SOOO  and  under 
$900;  (4)  those  over  $900  and  under  $1200; 
(5)  those  over  $1200,  we  find  that  the  velocities  of 
circulation  were,  respectively,  17,  59,  61,  90,  137. 
These  figures  certainly  suggest,  if  they  do  not  prove, 
that  for  a  given  price  level,  the  greater  the  expendi- 
ture, the  higher  the  rate  of  turnover.  In  other  words, 
the  turnover  varies  with  the  volume  of  trade  of  the 
individual.  If  this  conclusion  is  sound,  then  the 
larger  the  per  capita  trade  of  a  community,  the  more 
rapid  the  turnover  of  money,  and  presumably  of 
deposits,  wliidi  is  simply  what  we  should  expect  on 
general  principles ;  for  it  merely  means  that  the 
larger  the  scale  of  any  business  operation,  the  greater 
the  economj'  of  the  use  of  cash.  Small  stores  have 
to  kec])  a  larger  stock  of  cash  relativel\  to  their  busi- 
ness than  large  stores,  just  as  small  banks  need  a 
larger  reserve  in  proportion  to  business  transacted. 
From  this  conclusion  the  surprising  result  follows: 
that  though  nii  increase  of  the  world's  volume  of 

139 


'^ 


M 


r 


i  l-g! 


WHY    IS   THK    DOLLAR   SHRINKING?    [Cn.  IX. 

trade  tends  directly  to  reduce  the  general  level  of 
prices,  nevertheless,  if  that  increase  is  greater  than 
the  increase  in  the  i)opulation  so  that  there  is  an 
actual  jH'r  capita  increase  in  the  volume  of  trade, 
then  this  exerts,  as  an  indirect  effect,  a  counter 
tendency  to  raise  prices  by  increasing  the  velocity 
of  circulation  of  money  and  credit.  The  meagre 
statistics  of  the  students  referred  to  may,  it  is  true, 
not  be  typical ;  but  taking  them  as  we  find  them,  they 
indicate  that  a  trebling  in  the  per  capita  trade  causes 
a  doubling  in  the  velocities  of  circulation  of  money 
and  credit.  This  strongly  suggests  the  conclusion 
that  any  eflfect  on  the  price  level  from  an  increase 
in  the  volume  of  trade,  so  far  as  it  is  an  increase  per 
capita,  is  more  than  half  counteracted  by  the  indirect 
effect  on  the  velocities  of  circulation. 

But,  with  this  exception  and  apart  from  transition 
periods,  the  three  groups  of  magnitudes  which  de- 
termine the  price  level  —  (1)  money  and  deposits, 
(2)  their  velocities,  (.3)  volume  of  trade  —  are 
practically  independent  of  each  other.  That  is  to 
say,  a  change  in  the  quantity  of  money  (and  therefore 
of  deposits),  though  it  may  temporarily  afl'ect 
velocities  and  trade,  will  not  do  so  in  the  long  run. 
Instead,  it  will  exert  all  its  efi'ects  on  prices,  which 
will  therefore  change  in  the  same  proportions. 
Similarly,  a  change  in  velocities,  though  it  may 
temporarily  affect  money  and  deposits  as  well  as 
trade,  will  not  do  so  in  the  long  run,  but  will  also 
cxtTt  all  its  effects  on  prices. 

140 


§  2.1  DISCrsSldN    OF   PKINCIPLES 

These  conclusions  rest  on  the  fact  that  careful 
study  and  investigation  fail  to  show  any  other  rela- 
tions among  the  factors  in  the  equation  of  exchange 
than  those  which  have  been  mentioned. 

§  2.  An  Increase  of  Money  does  not  Decrease  its 

Velocity 

As  no  one  denies  the  truth  of  the  equation  of  ex- 
change, any  one  who  could  disprove  the  quantity 
theory  of  money  (in  the  sense  maintained  in  this 
book)  must  do  so  by  showing  that  an  increase  in 
the  quantity  of  money,  instead  of  tending  to  increase 
the  level  of  prices,  tends  rather  to  affect  one  or  more 
of  the  other  four  elements  in  the  equation  of  exchange, 
viz.,  either  (1)  to  decrease  the  velocity  of  circulation 
of  money,  or  (2)  to  decrease  the  deposits  subject 
to  check,  or  (3)  to  decrease  their  velocity,  or  (4)  to 
increase  the  volume  of  trade.  None  of  these  prop- 
ositions has  any  evidence  in  its  support. 

It  cannot  be  shown,  for  instance,  that  (except 
during  transition  periods)  there  is  any  tendency  for 
an  increase  in  the  quantity  of  money  to  decrease  its 
velocity  of  circulation.  Some  persons  who  have 
never  investigated  the  subject  imagine  that  if  money 
were  suddenly  doubled  in  quantity,  prices  need  not 
rise  but  that  the  public  would,  for  some  unaccount- 
able reason,  carry  double  the  former  quantity  of 
money  while  expending  precisely  the  same  amounts ; 
in  other  words,  that  the  velocity  of  circulation  of 
money  w'ould  decrease.      Rut  tliis  would  he  incon- 

141 


i 


T^     1 

i  u 


'It 


i> 


# 


•5*^ 


, 

'.' 

fV' 

'  '  ,  '»  ' 


It 


■1*!' 
f- 


FT    ;■ 


■  f 


WHY    IS  TlIK    DOLLAR   SIIRINKINO?    [Ci.  IX. 

venient  and  we  have  seen  that  the  velocity  of  circula- 
tion of  money  is  determined  by  tlie  convenience  of  the 
people.  They  find  for  themselves  what  is  the  most 
convenient  amount  to  carry  in  order  that  it  shall  be 
best  adapted  to  meet  their  i)artieular  exi)enditures. 
If,  then,  money  and  expenditure  are  mutuallyadjusted 
to  suit  the  convenience  of  the  people,  this  implies  that 
any  increase  in  the  amounts  carried  would  (for  a  given 
price  level)  be  inconveniently  larjie. 

To  make  the  picture  definite,  let  us  suppose  that 

the  average  per  capita  amount  of  money  in  actual 

circulation  in  the  United  States,  outside  of  the  United 

States  Treasury  and  the  banks,  is  about  SI'),  and 

that  some  mysterious  Santa  Ulaus  suddenly  doubles 

the  amount  in  the  possession  of  each  individual. 

This  means  that  the  average  individual  will  have  S'M), 

where  before  he  had  Slo.     Now,  statistics  show  that 

the  average  per  capita  amount  in  circulation  changes 

only  a  few  cents  from  month  to  month.     While  the 

amount   of   money   carried   by   an   individual   will 

necessarily  fluctuate  because  of  his  expenditures  and 

receipts,  in  a  large  group  of  pet)ple  the  average  amount 

carried  by  the  several  individuals  composing  the 

group  will  fluctuate  but  Httle.     If,  then,  so  large  an 

addition  to  the  total  circulation  is  suddenly  made  as 

to  put  fifteen  extra  dollars  per  capita  in  the  hands  of 

the  public,  the  first  thought  of  most  people  will  be 

how  to  get  rid  of  this  inconvenient  addition  to  the 

money  which   they  are  (arrying.     If  they   should 

be  inclined  to  hoard  it  in  stockings  or  safes, or  to  bury 

112 


12) 


DISCUSSION  OF    PRINCIPLES 


it  in  the  earth,  or  to  (lro[)  it  into  the  sea,  it  would  have 
no  tendency  to  raise  prices.  Instead,  however,  they 
will  seek  to  make  some  use  of  it  either  l)y  expending 
it  for  goods  or  by  depositing  it  in  banks.  Thus  u  few 
days  after  the  supposed  visit  of  Santa  C'jaus,  tlie 
surprised  recipients  of  the  extra  money  will,  in  most 
cases,  have  disposed  of  it  in  one  of  these  two  wa>s. 
To  the  extent  that  they  dispose  of  it  in  the  first 
way,  —  in  the  purchase  of  goods,  —  it  is  evident  that 
there  will  be  a  tendency  to  raise  prices,  for  the  sudden 
expenditure  of  Slo  per  capita,  even  by  a  .small 
fraction  of  the  people  of  the  L'nited  States,  will  mean 
a  phenomenal  rush  upoti  the  shops. 

The  average  individual  does  not  expend  in  actual 
money  more  than  81o  in  two  weeks.  This  is  about 
a  dollar  a  day,  or  about  S1(M),()()(),()0()  a  day  for  the 
entire  country.  If  within,  let  us  say,  five  days  from 
his  windfall  of  Slo  the  average  man  should  try  to 
spend  an  extra  sum  of  SI."), the  result  would  be  $:i  per 
day  per  capita,  or  S;}()(),()0(),Of)()  a  day  for  the  nation. 
This,  in  addition  to  the  usual  S1(K).0()(),()()()  a  day, 
would  make  S4()(),()()(),()()()  a  day,  or  four  times  the 
ordinary  rate  of  expenditure.  Such  a  sudden  brisk- 
ness in  trade  would  astonish  the  shojjkeepers  and 
lead  them  promptly  to  raise  their  prict  s  ;  otherwise, 
in  many  cases  their  stocks  would  be  entirely  depleted. 

At  first  sight,  it  might  seem  that  it  would  only 
require  a  few  days  for  each  t)ne  to  get  rid  of  his  extra 
money  so  that  the  flurry  in  [)rices  would,  therefore, 
be  only  temporary  ;    but  such  reasoning  would  be 

143 


,  il 

i 


14; 
it: 


♦  I, 


It  i  < 


I 


:»! 


1".. 

V': 


■i! 


ii  M 


WHY    IS  THE    DOLLAR   SHKlNKLVn?    [Ch.  IX. 

fallacious  ;  for  we  must  ot  forgot  that  the  only  way 
in  which  the  iiuHvidual  can  j?ct  rid  of  his  money  is  by 
handiiijj  it  over  to  somebody  else.  Society  is  not  rid 
of  it.  If  the  shopkeepers,  who  under  our  Santa  (')iuis 
hypothesis  have  already  had  their  till  money  doul'led 
mysteriously,  receive  in  addition  the  surplus  cash 
of  their  customers,  they  will  now  1h'  the  (,nes  em- 
l)arras.sed  with  a  surplus  of  cash  and  will,  iii  their 
turn,  endeavour  to  get  rid  of  it,  by  purchasing  gvxxls 
for  their  business  or  by  depositing  it  in  banks. 
Since,  then,  the  effort  to  get  rid  of  money  by  trans- 
ferring it  mercl\  results  in  somebody  else  having  a 
surplus,  the  surplus  in  the  community  remains 
unchanged.  Therefore,  the  efl'ort  to  get  rid  of  it  and 
the  consequent  effect  on  |)ricc^  will  continue  until 
prices  have  reached  a  sufficiently  high  level. 

This  conclusicm  cannot  be  avoided  by  supposing 
that  most  of  the  money  is  not  spent  in  trade,  but 
deposited  in  banks.  The  bankers  whose  deposits 
are  thus  suddenly  swollen  will  now  be  the  ones  who 
will  strive  to  get  rid  of  the  surplus  cash.  Xo  banker 
wishes  to  have  idle  reserves,  and  each  will  make  the 
increase  in  reserves  the  basis  for  an  increase  of  busi- 
ness, including  an  increase  of  deposits.  We  have 
seen  that  this  tendency  results  ultimately  in  preserv- 
ing the  relative  amounts  of  the  three  magnitudes: 
money  in  circulation,  money  in  bank  reserves,  and 
deposits  based  on  these  reserves.  In  the  end,  then, 
the  doubling  of  society's  money  will  mean  a  doubling 
(1)  of  the  m'-ncy  iv,  drculation,  (2)  of  the  money 

144 


•J  I 


DISCMISSIUN   OF    PRINCIPLES 


ill  hanks,  and  (.'?)  of  tlic  (lt'|H)sits  hused  on  tliis  money. 
In  a  .short  tinn'  it  will  also  mean  a  douhling  of  prices, 
for  as  Ifin^  as  prices  fail  to  he  doiil)le  wluit  they  were, 
there  will  he  tiie  same  phenomenon  of  inconvenient 
snrpluses.  Individuals,  tradesmen,  bankers,  etc., 
will  he  trying  to  m-t  rid  of  these  sur])luses,  and  their 
efforts  to  get  rid  of  them  must  tend  to  raise  prices. 
When,  however,  prices  have  reached  double  their 
orij,'inal  level,  there  will  be  no  longer  any  effort  to 
get  rid  of  surplus  cash  ;  for  there  will  be  no  surplus 
cash.  The  .Sot)  i)er  capita  which  has  thus  been 
created  will  no  longer  seem  exces.sive,  in  view  of  the 
fact  th.it  prices  are  double  what  they  formerly  were 
and  that  the  persons  carrying  this  money  will,  on 
the  average,  fin'  their  wages  or  incomes  doubled 
likewise.  Thus,  if  formerly  the  average  individual 
was  accustcjined  to  spend  $'M){)  and  to  carry  an  aver- 
age balance  «)i  $15,  he  will  now  spend  SOIR)  and  carry 
an  average  balance  of  $'M).  The  adjustment  of  the 
S)5()  relatively  to  S()()(l  has  exactly  the  same  signifi- 
cance as  the  former  SI")  relatively  to  $U(X).  In 
either  case  the  relation  is  one  to  twenty,  which 
means  that  the  individual  turns  his  money  over, 
on  the  average,  twenty  times  a  year.  Thus,  in  the 
end.  a  doul)ling  of  the  quantity  of  money  uucs  not 
exert  its  effect  in  disturbing  the  velocity  of  circula- 
tion, but  in  raiding  the  general  level  of  prices. 

It  is  woi  ih  noting  that  the  imaginary  example  we 
have  given  rt  presents,  except  in  its  details,  exactly 
wliat  urtiially  happ.  ii:s  when  new  gold  is  discovered. 
'  145 


I 

if 
'ii. 


WHY    IS  THK    DOLLAR   .SHIlINKIN<i  /    [Cii    IX. 


•I 


H  t 


I  -■  W^ 


li  ^* 


-■■:!^ 


;/ 


Gold  miners  fonwrt  tlu-ir  product  into  nionry,  soinc- 
tiaivs  usin^  it  us  siicli  in  the  form  of  imRK^'t^^ «""  w''' 
dust  and  sometimes  taking  it  tr»  the  mint  and  eon- 
verting  it  into  coin.  They  find  themselves  in  posses- 
sion of  huKs  full  of  money  fur  beyond  what  they 
nee<l  us  the  most  convenient  amount  of  pocket  money. 
If,  for  instance,  one  of  these  men  has  just  received 
from  the  mint  a  thousand  dollars  in  f;old,  he  is  almost 
sure  to  j?et  rid  of  at  least  $\)!iO  of  it  as  speedily  as 
possible,  either  by  spending  it  or  by  depositing  it  in 
the  bank.  In  either  case,  he  and  the  hundreds  of 
others  who  are  doing  the  same  thing  tend  to  raise 
prices  in  the  community  where  they  are  spending 
their  money  or  checks  on  the  banks  in  which  they 
deposit  their  money. 

It  was  thus  that  prices  rose  in  the  mining  camps 
of  California  a  half  dozen  decades  ago  and  in  Colo- 
rado and  the  Klondike  one  or  two  decades  ago. 
This  local  rise  of  prices  then  communicated  itself  to 
other  places;  for,  as  we  have  seen,  the  price  level 
cannot  in  one  locality  greatly  exceed  tl;.it  in  a  neigh- 
bouring locality  without  causing  an  export  of  money 
to  the  cheaper  locality. 

Thus,  new  money  gradually  finds  its  way  into 
circulation  througlumt  tlie  world,  raising  prices  as 
it  flows  from  place  to  place.  The  ])rocess  of  raising 
prices  consists  in  all  cases  of  the  cti'ort  to  get  rid  of  an 
inconvenient  surplus  of  cash  or  deposits,  a  surplus 
which  cannot  be  permanently  got  rid  of  by  transfer- 
ring it  from  hand  to  hand,  but  only  by  a  ri«.e  of  prices. 

110 


I  t 


§  2.: 


UISCrSSION'    OK    PKI\{MFLFS 


In  this  Wiiy  it  cuuM  Im-  shown  that  an  incrrnso  in 
the  <in.'Mitity  of  inonc.v  will  not  affect  thr  velocity 
of  circulation  of  hank  deposits  (C)  nor  the  volume 
of  trade  (7).  It  will  merely  increase  the  vol- 
ume of  deposits  {M')  and  tin-  level  of  prices  (P). 
IJut,  of  course,  a  chanj;e  of  money  iM)  does  not 
prevent  other  causes  from  acting'  -t  the  same  time; 
thes<'  other  causes  may  and  do  affect  the  6ve  factors 
M,  M',  I',  I",  and  T,  and  often  aggravate  or  neu- 
tralize the  etVect  of  money  (A/)  on  the  level  of  j)rices 
(/').  The  eiFects  (»f  thise  other  causes,  however, 
are  not  the  effects  of  money.  So  far  as  money  hit 
if.selj  is  concerned,  its  ellVet  is  only  on  deposits  {^f') 
and  the  price  h'vel  (P)  and  is  proportional  to 
its  (piantity.  The  imi)ort'?nce  and  reality  of  this 
proposition  is  not  diminished  in  the  least  by  the  fact 
that  the  "other  causes"  seldom  or  never,  as  a  matter 
of  fact,  remain  quiescent  and  allow  the  effect  on 
prices  of  an  increase  in  money  to  be  seen  separately 
from  effects  of  other  causes.  The  etlVcts  of  change'^ 
in  money  are  always  blended  with  the  effects  of 
changes  in  the  other  factors  in  the  equation  of  ex- 
change, just  as  the  effects  of  gravitx'  upon  a  falling 
body  are  blended  with  the  effects  of  the  resistance 
of  the  atmosphere. 

Our  main  conclusion,  then,  is  that,  after  careful 
study,  we  find  nothing  to  interfere  with  the  truth 
of  the  quantity  theory,  that  variations  in  money 
(M)  produce  normally  pronortioual  changes  in 
prices, 

147 


WHY    IS   THE    DOLLAR   SHRINKING?    [Cv.  1 


§  3.  An  Index  Number  of  Prices 

We  have  been  studying  the  causes  determining 
the  purchasing  power  of  money,  or  its  reciprocal, 
the  general  level  or  scale  of  prices.     Hitherto  we 
have  not  examined  very  carefully  exactly  what  a 
"general  level"  of  prices  may  mean,  although  in 
Chapter   III,  §   1,  a   simple    imaginary   case   was 
considered   in  which  the  average  price  of  bread, 
cloth,  and  coal  was  worked  out.      There  was  no 
need  of  defining  a  general  level  of  prices  so  long  as 
we  assumed,  as  we  have   done  hitherto,  that  all 
prices  move  in  perfect  unison.      But,  practically, 
prices  never  do  move  in  perfect  unison.     If  some 
prices  (ps)   do  not   rise  enough   to  preserve    our 
equation,  others  must  rise  more.     U  some  rise  too 
much,  others  must  rise  less.     The  case  is  further 
complicated  by  the  fact  that  some  prices  cannot 
adjust  themselves  at  all  and  some  can  adjust  them- 
selves but  tardily.    A  price  fixed  by  contract  can- 
not be  affected  by  any  change  coming  into  operation 
between  the  date  of  the  contract  and  the  date  of 
its   fulfilment.      The    existence    of   such  contracts 
constitutes  one  of  the  chief  argument-^  for  a  system 
of  curn    cy  such  that  the  uncertainties  of  its  pur- 
chasing power  are  the  least  possible     Contracts  are 
a  useful  device ;   and  an  uncertain  monetary  stand- 
ard disarranges  them  and  discourages  their  forma- 
tion.    Even   in  the  absence  of  explicit  contracts, 
prices  may  be  kept  from  adjustment  by  implied 

148 


5  31  DISCUSSION  OF   PRINCIPLES 

understandings  and  by  the  mere  inertia  of  habit. 
And  besides  these  restrictions  on  free  movement  of 
prices  there  are  often  legal  restrictions ;   as,  for  ex- 
ample, when  railroads  are  prohibit.-d  from  charging 
over  two  cents  per  passenger  per  m" le.  or  when  street 
railways  are  limited  to  five-cent  or  three-cent  fares. 
Whatever  the  causes  of  non-adjustment,  the  result 
is  that  the  prices  which  do  .-hangc  will  have  to 
change  in  a  greater  ratio  than  they  would  were 
there  no  prices  which  do  not  change.     Just  as  an 
obstruction  put  across  one-half  of  a  stream  causes 
an  increase  of  current  in  the  other  half,  so  any 
(U-ficiency  in  the  movement  of  some  prices  must 
cause  an  excess  in  the  movement  of  others. 

Another  class  of  goods,  the  price  of  which  cannot 
fluctuate  greatly  with  other  prices,  are  those  special 
commodities  which  consist  largely   of  the   money 
metal.     Thus,  in  a  country  employing  a  gold  stand- 
ard, the  prices  of  gold  for  dentistry,  of  gold  rings 
and'  ornaments,   gold   watches,   gold-rimmed   spe - 
tacles,  gilded  i)icture-frum(>s,  etc.,  instead  of  vary- 
ing in  proporti<»n  to  other  prices,  always  vary  m  a 
smaller  proportion.     The  range  of  variation  is  the 
narrower,  the  more  predominantly  the  price  of  the 
article  depends   upon  the  gold   as  one  of   its  raw 

materials. 

From  the  fact  that  gold-made  articles  are  thus 
more  or  less  securely  tied  in  value  to  the  gold 
standard,  it  follows  also  that  the  prices  of  substitutes 
for  such  articles  will  tend  to  vary  less  than  prices 

141) 


¥'(  i  ■ 


I. 


WHY   IS  THE   DOLLAR  SHRINKTNC  ?    [Ca.  IX. 

in  general.  These  substitute  articles  will  include 
silver  watches,  ornaments  of  silver,  and  various 
other  forms   of   jewelry,  whether   containing  gold 

or  not. 

A  further  dispersion  of  prices  is  produced  by  the 
fact  that  the  special  forces  of  supply  and  demand 
are  constantly  playing  on  each  individual  price,  and 
causing  relative  variations  among  them,  and  al- 
though these  variations  cannot  alfect  the  general 
price  level,  they  can  affect  tiie  number  and  extent 
of  individual  divergencies  above  and  below  that 
general  level. 

It  is  evident,  therefore,  that  prices  must  con- 
stantly change  relatm'hj  to  each  other,  whatever 
happens  to  their  general  level.  It  would  be  as  idle 
to  expect  a  uniform  movement  in  prices  as  a  uni- 
forLi  movement  for  all  bees  in  a  swarm.  On  the 
other  hand,  it  would  be  as  idle  to  deny  the  existence 
of  a  general  movement  of  prices  l)ecause  they  do  not 
all  move  alike  as  to  deny  a  general  movement  of  a 
swarm  of  bees  because  the  individual  bees  have 
different  movements.  The  general  movement  of 
prices  is  expressed  by  an  "index  number"  which 
gives  the  average  level  of  pricc'^  at  any  time  as 
compared  witli  some  other  time  used  for  c«miparison. 

Besides  the  changes  in  individual  prices,  there 
will  be  corresponding  chanijes  in  the  (luantities  of  the 
commodities  which  are  exchanged  at  these  prices 
respectively.  In  other  words,  as  each  />  changes, 
the  Q  connected  with  it  will  change  also,  because 

150 


5  3.1 


DISCUSSION   OF   PRINCIPLES 


usually  any  influence  atfecting  the  price  of  a  com- 
modity will  also  affect  the  consumption  of  it. 

We  see,  therefore,  that  it  is  well  nigh  useless  to 
speak  of  uniform  changes  in  prices  (p's)  or  of  uni- 
form changes  in  quantities  exchanged  (Q's).  There- 
fore, instead  of  supposing  such  uniform  changes,  we 
must  now  proceed  to  the  problem  of  developing  some 
convenient  method  of  indicating  by  an  average^  the 
general  trend  of  the  changes  in  prices  or  in  quantities. 
We  must  formulate  iwo  composite  or  average  mag- 
nitudes:  the  price  level  (P)  or  index  number  or 
"  scale  "  of  prices  on  the  one  hand  and  the  volume 
of  imde  (T)  on  the  other. 

As  we  have  seen  in  (liapter  III,  P  is  an  average  of 
all  the  }>'>  and  T  is  the  svmi  of  all  the  Q'^-  P  is 
the  "  index  number  "  of  the  general  level  of  prices. 

In  order,  in  practice,  to  calculate  P  and   T,  suit- 
able uuiis  of  measure  for  the  various  articles  must  be 
selected.     The  ordinary  units  in  which  the  various 
Q's  are  measured  will   not  be   the  most  suitable. 
Coal  is  sold  l)y  the  ton,  sugar  by  the  i)ound,  wheat 
by    the    bushel,    etc.     If    we    should    raerel>    add 
together  tliese  tons,  pounds,  bushels,  etc.,  and  call 
their  grand  total  so  many  "units"  of  commodities, 
we  should   have  a  very  arbitrary  summation.     It 
will   make   a  differ(>nce   in   the   result    whether   we 
measure    coal    by    tons    or    lumdredweights.     The 
system  beconu's  less  arbitrary  and  more  useful  for 
the  purpose  of  comparing  price  levels  in  ditlVrent 
years  if  we  use,  as  the  unit  for  measuring  any  coni- 

l.'il 


li 


b 


r: 


li  '*' 


WHY    IS   THE    DOLLAR   SHRINKING :"    [Cii.  IX. 

modity.  not  the  unit  in  which  it  is  commonly  sold, 
but  the  nniouvi  which  mmfitiife.'i  a  "(hillor\f  worth" 
at  some  particular  year  called  the  ha.sr  year.  Tlien 
every  price  in  tiie  base  year  becomes  exactly  one 
dollar,  and  the  average  of  all  ])rices  in  that  year  also 
becomes  exactly  one  dollar.  In  any  other  year,  the 
average  price  {i.e.,  the  average  of  the  prices  of  the 
arbitrarily  chosen  units  which  in  the  base  \ear  were 
worth  a  dollar)  will  be  the  index  number  representing 
the  price  level,  while  the  number  of  sucli  units  will 
be  the  volume  of  trade.  Thus,  let  us  sui)p<)se,  for 
simplicity,  that  there  are  only  three  commodities 
(bread,  coal,  and  cloth),  and  let  vis  use  the  accom- 
panying table  for  facts  to  start  witli. 


I'jlliE,--  UN   DilI.l.MtS) 


(ir  vMiru-.t  l!xriisNi;Kt) 


Vkak 


i    Hn-ii.l 

(■,,:il 

1     'l"'i" 
'■    l.oaf' 

\ 

.'I'"- 

loll'      { 

-1 

C-|,,;l,    \     111.   ,,1  Coal       '     Cldth 

ip.r     ;  I  \!illi..ii.-    ■  Milliorifi    (Milhdtii 
■^'iirdi    lui  l.naM'-.)    ,if   Ynu^)    of   ^  :iril^) 


190!)      .     .     .      .lit       •")■'«>  I    lO" 
1014      .     .     .      .1')       t'tH)  ;    l.lll 


210 


10 
II 


:;o 


We  wish  to  comi)arc  the  average  i)ri(e  or  price 
level  in  the  year  1!»14  witli  tliat  in  HHI!)  as  tlie  base 
year,  and  also  to  reckon  the  total  voliuiie  of  trade 
in  1914  in  comj)arison  with  that  in  IIHIU.  If  we 
were  not  desirous  of  taking  great  pains  to  srcure  the 
best  results,  we  could  use  the  above  figures  ]\\>t 
as  thev   stand  —  averaging   the    prices    and    adtl- 


5  3  ]  DISCUSSION   OF  PRINCIPLES 

ing  together  the  quantities.  By  this  rouRh-aiul- 
readv  method  tiie  average  price  per  unit  for  1909 
wouid  he  (.10  +  5.00  +  1.00)  ^  3,  or  S2.0:i ;  and 
for  1914  (.IT)  +  B.OO  +  1.10)  -r  3,  or  S'2.42;  the 
total  trade  for  1909  wouid  he  200  +  10  +  •^^\  or  240 
milli.Mi  units;  and  for  1914.  210  +114-  I^).  or  250. 
Tliat  is,  the  priee  U>vel  would  show  a  rwe  between 
1909  and  1914  from  S2.0:5  to  S2.42,  or  a  rise  of  19.2 
per  cent,  wiiile  the  volume  of  trade  would  show  a 
rise  from  240  to  2.50,  or  O.ii  per  cent. 

But  the  simpk<  method  just  used  gives  too  much 
weight  in  the  i)rice  com])arison  to  coal,  the  price  of 
wiiich  happens  to  he  expressed  hy  a  IjTge  number, 
simply  because  it  is  measured  b\-  a  large  unit.  One 
way  to  reme<iy  this  disproportionate  weighting  is  to 
measure  all  articles  b\-  one  unit,  as  the  pound ;  but 
a  better  way  is  that  already  described  above,  viz., 
to  use  as  our  unit  "the  dollar's  worth  in  1909." 
The  dollar's  worth  of  bread  in  1909  was  evidently 
ten  loaves,  the  dollar's  worth  of  coal,  the  fifth  of  a 
ton.  and  that  of  cloth,  the  yard.  Taking  these 
units,  we  now  have  :  — 


1  Phiikh  (in  Dom-ah!*) 

YkaH         I      „„,,„,  (.,,,1  Cloth       i 


190'.  t 
I'.ll  1 


(per  'Pi'ii        (|"T  k 
Im:i\i-^\  Tiilll 


Vnr.n 


(JVANTITIKS 

'^'■'■■"'  Coal        '      Cloth 

iMilhoMS     ,;^jjl|j„„V  (M.lliotlS 

"''''■"      of  JT""^'  "f  Vard.-) 
I.oavi'sl 


1.00         l.(«)         1.01)  -'0  -'O 

l..-,0         1.20     I     1.10  '.'1  •>'> 


no 


153 


-^i 


m-yp^: 


.4 


7  ' 


WHY    IS  THE   DOLLAR  SHRINKING?    [Ch.  IX. 

The  average  price  in  1909,  on  the  basis  of  these 
new  units,  is  simply  $1,  since  this  is  the  price  of 
each  inaividual  article;  while  the  average  price  in 
1914  is,  if  we  take  the  simple  arithmetical  average, 
(«l.r,0  +  S1.20  +  Sl.lO)  -^  3,  or  $1.27.  The  total 
volume  of  trade  in  1909  is  (in  millions  of  units) 
20  +  m  +  30,  or  100 ;  and  in  1914,  21  +  55  +  35, 
or  1 1 1 .  Thus,  according  to  this  reckoning,  the  price 
level  has  risen  from  $1.00  to  $1.27,  or,  as  it  is  usually 
expressed,  from  a  base  of  KK)  per  cent  to  a  height 
of  127  per  cent  —  a  rise  of  27  per  cent ;  while  trade 
has  increased  from  100  milli(m  units  to  111  million 
units,  an  increase  of  11  per  cent. 

We  may  slightly  improve  the  above  method  by 
taking  for  1914  a  "weighted"  average  of  prices  in- 
stead of  a  simple  average.     It  is  found  by  dividing 
the  total  value  of  all  the  goods  by  their  total  quan- 
tity.    This  is  a  better  method  because,  in  the  result, 
it  gives  less  weight  to   the  commodities  less  dealt 
in,  such  as  bread.    The  average  for  1909  will  still 
be  SI  .00,  for  that  is  the  price  for  each  individual  com- 
moditv;    but  the  average  for  1914  will  be  slightly 
dirtVrcnt.     The  total  value  is  (in  millions  of  dollars) 
l.r,0  X  21  +  1.20  X  .').')  +  1.10  X  3.-i,  or  136minion 
dollars,  and  the  total  quantity  is.  as  we  have  already 
seen,  21  4- 55  +  35,  or   HI   million  units;    conse- 
quentlv.  tiie  average  price  is  130  ^  lU,  or  -SI. 2:?. 
According  to  this  last  and  best  method,  then,  the 
price  level  has  risen  from  S1.<»0  (<>r  100  per  cent)  to 
SI. 23  (or  123  per  cent).     That  is,  the  index  numbers 

ir)4 


8  3.1 


DISCUSSION  OP  PRINCIPLES 


are  100  per  cent  for  1900,  and  12:J  per  cent  for  1914. 
This  indicates  a  rise  of  23  per  cent. 

The  results  of  tlie  three  inetiiods  of  reckoning  the 
average  rise  of  prices  differ  slightly,  showing  re- 
spectively a  rise  of  19,  27,  and  23  per  cent.    Other 
methods  '  of  which  many  are  possible,  would  also 
differ   slightly.     No    method    gives   an    absolutely 
perfect  index  of  changes  in  price  levels,  but  the  last 
one  worked  out  above  is  as  good  as  any.    The 
main  point  in  any  ssstem  of  averages  is  to  give 
great  weight  to  the  great  staples  of  trade,  and  little 
weight  to  the  insignificant  articles.     Radium  has 
fallen  in  price  enormously  in  the  last  few  years, 
but  radium  is  so  unimportant  as  an  article  of  com- 
merce that  its  great  fall  ought  not  to  be  allowed  in 
our  reckoning  to  have  much  ett'ect  on  the  index 
number  for  the  general  price  level. 

Fortunately,  it  is  found,  in  practice,  that  most 
methods  of  computing  index  numbers  show  sub- 
stantially the  same  general  changes  in  price  levels. 

I  The  reader  who  is  interested  in  a  study  of  the 
comparative  merits  of  some  two  seore  methods  of  eom- 
putiu«  index  numbers  is  referred  to  tli.-  writer's  T/u' 
Purchasing  Power  of  A/oney,  New  York  jMaemillan),  19U. 
Chapter  X,  and  appendix  to  Chapter  X. 


155 


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11: 

M    I 

iV  >,  I 


if: 


f  I 


CHAPTER  X 

THE  HISTORY  OF   PRICE   LEVELS 

§  1.  Early  Records 

It  is  impossible  to  have  absolutel.N-  accurate  index 
numbers,  but  those  constructed  for  recent  years  by 
the  United  States  Bureau  of  Labour  are  accurate 
enough  for  all  practical  purposes.  For  the  remote 
past  we  have  only  very  rough  index  imrabers,  be- 
cause the  records  of  prices  in  past  times  are  so 
defective.  These  rough  index  numbers  arc  suffi- 
cient, however,  to  show  that  the  general  trend  of 
prices  during  the  last  ten  centuries '  has  usually  been 

'  Tilt-  authorities  to  whom  wv  owe  comparisons  with  ri>- 
moto  centuries  an?  D'Avenei,  Hunauer,  and  U'ber.  Com- 
parisons with  still  more  remote  times  have  been  made 
while  this  book  was  goin^  through  the  press  by  l*rof.  .1.  F. 
Ferguson  of  Bryn' Mawr who  writes  me  that  by  using  data 
from  th(^  •'  ediet  of  Diocletian  "  ;i()l  a.d.  the  pries  of  ele\  ,n 
kinds  of  foods  are  found  to  average  .')0  to  (>();  of  their  prices 
in  the  Ignited  States  in  1912  ad.  Incidentally  we  may  men- 
tion the  fact  that  Prof.  Ferguson  also  works  <mt  the  relative 
wages  for  ten  occupations,  showing  that  tlu'  Roman  wages 
in  :U)1  A.D.  were  only  S  to  2U  ■ ;  of  present  American  wages. 
Thus  the  Roman  workman  received  less  than  one  tenth  of 
the  money  wages  prevailing  at  present  and  paid  more  than 
half  as  much  for  food  ;  so  it  would  api)ear  that  ho  enjoyed 
less  than  one-tilth  as  much  real  income  as  a  presout-day 
Ameriean  labourer. 

150 


I  1.1       THE  HISTORY  OF  PRICK   LEVELS 

upward.  Judpinj:  from  some  records  for  the  eighth 
and  ninth  centuries,  we  may  conchide  that  prices 
are  now  five  to  ten  times  us  high  as  then  —  1100 
years  ago  —  and  from  four  to  six  times  as  high  as 
in  the  period  between  1200  and  l.")(M)  a.d.  Since 
the  last  date,  that  is.  practically,  since  the  discovery 
of  America,  prices  have  almost  steadily  risen. 
Figure  5  shows  the  estimates  — which,  of  course, 
are   only  very    rough  — of    D'Avenel   for   France. 


:» 

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!•  i(i.  5.  —  France 

They  cover  continuously  the  period  between  1200 
and  1790  and  include  comparisons  with  850  and 
1890. 

A  recent  book,  Thr  Lifcrnry  Profemnn  in  the 
FJizabetImn  Age,  by  Phnebe  Sheavyn,  brings  out  the 
resemblance  between  the  conditions  in  the  sixteenth 
century  and  those  of  to-day. 

"Meanwhile,  prices  were  rising  rapidly,  owing 
partly  to  increased  consumption,  partly  to  the  influx 
of  silver  from  the  West.  In  the  latter  half  of  the 
sixteenth  centur\',  corn  cost  from  three  to  ten  times 
the  average  price  of  the  previous  three  centuries. 
Sugar  rose  from  fourpcnce  to  half  a  crown.  Stowe 
tells  us  that  not  only  corn,  'but  all  things  else, 
whateviT  sustenance  for  man,  was  likewise  raised 
without  all  consi  ience  or  reason.'     Rents  increased 

157 


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1.1 


I*  H 


h 


WIIV    IS  THE    DOLLAR   SHRINKINO?     Km.  X. 

exorhitantly  duriiiK  the  same  period.  A  farm  which 
in  the  e;.rlier  part  of  the  century  let  for  ten  shillings, 
woul.l  fetch  in  loSli  us  mneh  us  ten  |M)un(ls." 

liishop  Fleetwood  in  17l)7  published  some  statistics 
which  led  him  to  believe  that  "  £0  two  hundred  and 
sixty  years  ago  was  equivalent  to  £2H  or  £:3()  now 
117071." 

The  su(( essivo  opening  of  gold  and  silver  mmes 
has  been  largely  responsible  for  the  repeated  upward 
movements  of  i)rices.       For  the  first  half  century 
after  the  disc. very  of  America  the  annual  average 
production  of  gold  was  less  than  five  millioJi  dol- 
lars.    (T(.-day  it  is  a  hundred  times  us  great  and 
that  of  silver  about  the  same.)     A  century  later, 
after  the  opening  of  the  rich  Potosi  mines  of  Bolivia, 
the  production  of  silver  was  four  times  as  great, 
averaging  IS  millions  of  dollars  a  y.  ar.      The  Xew 
World  mines  began  to  pour  their  product  into  Europe  ; 
first  into  Spain,  the  chief  owner  of  the  mines,  then, 
by  trade,  into  the  Netherlands  and  other  parts  of 
Kurope.    Accordingly,  as  the  economist.  Cliife  Leslie, 
showed,  prices  rose  first  in  Spain,  then  in  the  Nether- 
lands, and  then  in  other  regions.     The  rise  of  prices 
in  the  sixteenth  c(>ntury  was  so  rapid  as  to  consti- 
tute a  veritable  price  revolution. 

The  following  table  •  shows  the  estimates  which 
have  been  made  of  t\\v  stock  of  the  precious  metab 
in  Europe  at  the  different  century  years  and  the 

«  For  (h't.iils.  soo  Irvinp  Fisher,  The  I'urcha.sing  Pou'cr 
flj  Money,  pp.  2M-'2'S7. 

158 


i  I  ' 
'  .  1 


»-•!        THE  HISTORY   OF  PRICK    LEVELS 

price  levels  roughly  «<»m|>ul(«l  In   various  economic 
historians.' 


Datb 

L-)(K) 

KKK) 

17()(> 

IMK) 

IIKK) 

MfUl.H  IN   KlHOl't;   IN    (A!»   '  o    "*'    •'""  *•    I-tVtL 

Hii.i.ioNH  or  Uni.i, VHH  iif  l-^ltt)) 


170 

i4rj() 

1850 
oSOO 


3.") 

75 

90 

l(K) 

i2o(y) 


§  2,  The  Nineteenth  Centmy 

Bcjiinninn  with  the  close  of  the  (i^'htccnth  cen- 
tury we  hiive  more  exact  statistics  of  price  move- 
ments. Figure  (),  which  is  t'ornicd  1)\  joining 
together  the  statistics  of  J^.-vons  and  Saucrheck, 
shows  with  considerable  accuracy  the  changes 
in  the  general  price  level  in  Kngland  from  year  to 
year  from  17S2  to  19i:i  inclusive. - 

The  light  line  of  Figure  7  reproduces  the  cur\  e  of 
English  prices  in  Figure  G  from  1840  to  1913.^   Figures 

'  It  will  be  seen  from  thi  i  taMo  tliat  tla-  inereaso  in 
prices  did  not  kiep  up  with  the  incrtaso  in  the  stook  of 
mttals.  This  was  prr.sumal)ly  due  to  th(>  increase  in  tho 
volume  of  trade. 

-The  prices  Initween  ISOl  and  1S2(),  during  which  Eng- 
land was  on  a  basis  of  depreciated  paper  money,  an*  reduced 
to  the  gold  standard. 

'  This  curve  is  made  from  the  calculations  of  Ci.  H. 
Knil.bs,  of  Melhournc,  statistician  of  Australia,  being 
formed  by  combining  the  figures  of  Sauerbeck,  tho  Econ- 
oiuL^t,  and  the  British  Board  of  Trade. 

159 


111 


MICROCOPY    RESOLUTION   TEST   CHART 

lANSI  and  ISO  TEST  CHART  No    2) 


1.0 


I.I 


1.25 


■  50      '""^^ 


1.4 


2.5 
2.2 

2.0 
1.8 


1.6 


^  APPLIED  IM/1GE     Inc 

^^  165 J    East    Mam   street 

r.S  Rochester.    Ue»    vorl         1 4609       USA 

^=  (716)    482  -  OJOO  -  Phone 

=S  (716)    288  -  5989  -  Fax 


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I, 


WHY    IS   THE    DOLLAR   SHRINKING?     [Ch.  X. 

8  to  22  inclusive  present  in  their  light  lines  liie  price 
curves,  respectively,  of  the  United  States,^  Canada,^ 
Germany, France,  Belgium,  Holland,  Denmark,  Italy, 


/7ao   so 


■40      SO      eo      70 

Fiu.  0.  — •  LiikIuikI 


60     so     /soo    to 


20 


Austria,  Spain,  Australia,  New  Zealand,  New  South 
Wales,  Japan  and  India.^     The  dark  line  in  each 

'  Tho  figures  for  th«  United  States  are  those  of  the  Aid- 
rich  S<nato  Report  on  Wages  and  Prices,  supplemented  since 
1890  by  the  statistics  of  the  Bureau  of  Labor,  and  reduced 
by  Knibl>s  so  that  the  prici>  level  of  1911  maybe  lUO  per  cent. 

2  These  Clanadian  figures  are  those  of  Mr.  R.  H.  Coats, 
labour  statisti<'ian  of  Canada,  and  are  here  reduced  in  ac- 
cordance with  Knibbs'  calculations  to  make  the  index  num- 
ber for  1911  appear  as  100  per  cent. 

'  Tlie  above-named  curves  are,  for  the  most  part,  formed 
from  the  figures  of  Knibbs,  which,  in  turn,  are  taken  from 
various  available  sources.    The  figures  for  Holland,  Spain, 

160 


io 


M^l-Lzh:^^  li^ii'^iSl^ 


§  2.]       THE  HISTORY  OF  PRICE  LEVELS 


leo 

MC 

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M  10  00 

Fig.  7.  —  Eugluud 


s» 


diagram  represents  the  average  price  movement  of 
the  countries  of  the  world.*     It  will  be  seen  that 

Japan,  and  India  are  not  from  Knibbs,  but  from  tho  Bul- 
letin de  I'l/istitul  Internationale  de  la  Slati.stiquc  and  other 
statistical  publications. 

•  This   curve   is   also    from    Knibbs'   calculations,    and 
includes,  beginning  with   1S40,  England  and  the   United 
M  Itil 


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^^^-  I 


WHY    IS  THE    DOLLAR  SHRINKING?     [Ch.  X. 

the  price  movements  of  England,  the  United  States 
and  Canada  are  closely  similar  to  those  of  the 
world  in  general.  In  the  curve  for  the  United  States, 
however,  a  discrepancy  in  the  similarity  appears 
about  18G5,  as  our  Civil  War  and  the  "  greenbacks  " 
then  issued  caused  American  prices  to  soar  far  above 
those  of  other  lands.  These  inconvertible  notes,  i.e., 
the  "  greenbacks,"  deprt  'iated  so  greatly  that  the 
price  le\'el  in  the  United  States  actually  doubled 
between  18G1  and  1865.* 

The  statistics  of  the  three  countries  just  men- 
tioned, namely,  England,  the  United  States  and 
Canada,  are  the  best  price  statistics  which  we  have, 
and  show  a  remarkable  family  likeness,  since,  in  gen- 
eral, each  agrees  so  closely  with  the  average  for  the 

world. 

The  statistics  upon  which  the  diagrams  for  the 
remaining  countries  are  based,  are  not  so  good, 
as  usually  they  do  not  include  so  many  commodi- 
ties. This  probably  explains  why  in  some  of  these 
countries  we  do  not  find  so  perfect  an  agreement  as 
we  probably  would  find  if  we  had  more  perfect  sta- 
tistics. However,  even  with  the  imperfect  data  from 
which  these  curves  are  constructed,  there  is,  in 
general,  a  striking  similarity   between  the  average 

States;  from  1847,  France;  from  ISTA,  Germany;  from 
1861,  New  Zealand  and  Australia;  from  1890,  Belgium, 
Italy,  and  Canada.  All  the  statistics  are  reduced  so  that 
the  price  level  of  1011  shall  appear  as  100  per  cent. 

1  The  "  greenback  "  standard  existed  in  the  United  States 
between  1862  and  1878  inclusive. 

1G2 


§  2.J       THE  HISTORY  OF  PRICE  LEVELS 


It' 
'111 


go  TO  eo  90 

Fig.  S.  —  I'nit.d  ritatfS 


laoo 


163 


I 


WHY    IS   THE    DOLLAR   SHRINKING?     [Ch.  X. 

world  prices  (as  shown  by  the  dark  curve  in  each 
case)   and    the  prices   of    the    particular    country 

mentioned  (as  shown  by  the 
light  curve  in  each  case). 

The  most  striking  fact, 
therefore,  in  regard  to  the 
price  movements  in  various 
countries  is  their  similarity. 
This,  of  itself,  is  a  very  good 
reason  for  suspecting  some 
common  world-wide  cause 
to  be  at  work,  such  as  the 
gold  supply,  instead  of  the 
coincidence  of  local  causes 
in  different  countries,  such 
as  droughts,  tariffs,  trusts, 
etc. 

It  will   be   noted,  how- 
ever,  that   the  curves  for 
India  and  Japan  prior  to 
the  middle  of  the  '90's,  dis- 
agree with  the  world  curve. 
The  reason  for  this  discrep- 
ancy will  be  made  clear  a 
little  later  in  the   present 
section. 
The  main  periods  of  price  movements,  then,  since 
1789.  in  all  gold  standard  countries  for  which  we  have 
statistics  may  be  stated  approximately  as  given  below 
in  the  first  column.     It  is  imposubie  to  secure  very 

164 


leso  '900  1910 

Fia.  9.  —  Canada 


!l 


S  2.1        THE  HISTORY  OP  PRICE  LEVELS 


exact  statistics  of  the  volume  of  money  in  circulation, 
mucii  less  of  credit  currency  and  the  volume  of  trade 
and  still  less  of  the  velocities  of  circulation  of  money 
and  deptisits.  The  following  table,  therefore,  merely 
notes  in  the  last  column  any  increase  in  the  stock 
of  money  metals.' 


Stock  op  Money 

Date 

Pricks 

Metals  in  Edrofg 

1789-1809       .     .     . 

rose 

increasing 

1809-1849       .     .     . 

fell 

stationary 

1849-1873       .     .     . 

rose 

increasing 

1873-1896      .     .     . 

fell 

increasing  slightly 

1896-present  .     .     . 

rose 

increasmg 

The  question  now  is  —  do  the  facts  of  the  fore- 
going table  coincide  with  our  theory  of  price  levels  ? 
Their  agreement  is,  in  fact,  somewhat  remarkable 
in  view  of  the  complete  lack,  not  only  of  exact 
statistics  on  the  volume  of  trade  and  of  all  statistics 
whatever  on  velocity  of  circulation,  but  also  of 
statistics  on  the  volume  of  bank-notes,  government 
notes,  and  deposit  currency. 

We  know,  however,  that  modern  banking,  which 
had  scarcely  developed  at  all  before  the  French 
Revolution,  developed  rapidly  throughout  the  nine- 
teenth century.  It  is  also  known  that  banking  and 
deposit  currency  developed  more  rapidly  during  the 
third  period  in  the  table  (1849-1873)  than  during 

•  History  of  Precious  Metals,  Alexander  Del  Mar,  p.  449. 

105 


i 


f  1 


/«..=.#w: 


H 


r'Mi 


1, 


i  i 


i? 
^>; 

•i  ■ 
ii'i 

■il    ! 

I 

it;i 


Ii? 


WHY   IS  THE   DOLLAR  SHRINKING?    (Ch.  X. 

the  fourth  (187:5-1890),  which  fact  contributes 
somewhat  to  explain  the  contrast  between  the  price 
movements  of  these  two  periods. 


/ 

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V 

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lo-io  so  eo  10  60  so 

Fia.  10.  —  Germany 


1900 


10 


Sometimes  the  circulating  media  shot  ahea  af 
trade  and  then  prices  rose.  This  was  undoubtt  aly 
the  case  in  the  periods  1780-1809.  1849-1873,  and 
1890  to  the  present  time,  for  in  all  three  of  these 

100 


sl'J     the  history  op  price  levels 


^ 


periods  it  is  known  that  circulatinf:;  media  increased 
with  unusual  rapidity,  while  there  is  no  reason  to 


/6C  

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A,. 

1 

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50 


70  80  90 

Fig.  11.  —  Franco 


laoo 


believe  that  trade  increased  especially  fast.  In  fact, 
in  the  last-named  period,  in  which  wc  arc  now  liv- 
ing, there  is  strong  evidence  that  trade  is  lagging 

167 


% 


IF 


ill 


J' 
J- 


I': 


WHY    IS  THK   DOLLAR  SHRINKINO?     [Ch.  X. 

behind  media  of  excluinge  and  by  about  the  right 
amount  to  explain  the  rise  of  prices. 

On  the  other  hand,  we  may  reasoniibly  infer  that 
circuhiting  media  higged  beliind  trade  in  the  periods 


m 

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V 

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7 

H 

woo  1900  1310 

Fig.  12.  —  Hflciuni 


MO 

100 

f 

fO 

t 

ao 

>^ 

J 

<^ 

Vt: 

^ 

£0 

leso  1900  1010 

Fig.  13.  — Holland 


1S09-1S49  and  1S7:MS9(>,  for  in  the  former  case 
the  stock  of  circulating  media  did  not  increase  at  all 
and  in  the  latter  case  it   increased  but  slightly, 


S-'l        THE   HISTOUV   OF   PRICE   LEVELS 

wlim-as  thvTv  is  evidence  that  the  vohiine  of  trade 
increased  in  both  periods. 

We  may,  therefore,  summarize  the  course  of  price 
movements  during  the  nineteenth  century  by  the 
following  general  state- 
ments :  — 

1 .  Between  1789  and 
ISOO  prices  rose  rapidly. 
The  index  numbers  of 
Jevons  for  England 
which  give  us  the  first 
accurate  picture  of  price 
movements  increased 
from  85  to  157.  That 
is,  prices  practically 
doubled  in  twenty 
years.  This  rise  was 
doubtless  due  to  the 
increased  stock  of  gold 
and  silver,  which  in 
turn  was  due  to  their 
large  production  dur- 
ing this  period  as  com- 
pared with  the  periods 

before  and  after.  The  production  of  silver  was  es- 
pecially great.  The  Napoleonic  wars,  with  their  de- 
struction of  wealth  and  interference  with  trade,  prob- 
ably exercised  some  influence  in  the  same  direction. 

2.  Between  ISOO  and  1840  prices  fell.     The  fall  in 
England  was  measured  In'  Jevons  as  a  fall  from  157 

169 


120 

\ 

\^ 

A 

N 

N 

^ 

^. 

/I 

f 

\ 

0 

leeo 


90  laoo 

Fk;.  14.  —  Denmark 


10 


t 


"^Il^^^ 


WHY    IS   THK    DOLLAR   SUHINKINO?     (Cii.  X. 


i! 


to  64.  That  is,  in  forty  years  prices  wtrr  reducod 
to  Kss  thai)  half.  This  fall  was  presumahly  due  to 
the  lull  in  the  production  of  the  precious  metals, 

which  prevented  the  ajjgre- 
jjate  stock  from  keeping 
pace  with  the  volume  of 
business.  Indeed,  the  ag- 
^regate  stock  remained  sta- 
tionary, while  the  volume 
of  business  must  have  in- 
creased greatly.  Even  the 
development  of  bank  cur- 
rency was  insufficient  to  off- 
set the  continued  increase 
in  the  •  lume  of  business. 
It  is  1.  ~sting  to  observe 
that  this  period  of  falling 
._  prices  was  interrupted  by 
a  temporary  rise  after  1S33, 
which  Jevons  was  at  a  loss 
to  account  for,  but  which 
may  perhaps  be  explained 
by  the  inflow  of  Russian 
gold  after  the  discoveries 
of  gold  in  Siberia  in  1830. 

3.  Between  1 849  and  1873 
(although  with   two   nota- 
ble   interruptions)     prices    rose.      They    rose,    ac- 
cording to  Jevons'  figures  supplemented  by  Sauer- 
beck's, from  04  to  80,  and  according  to  Saucrbcck'r.; 

170 


v 

\ 

f 

\ 

^ 

\ 

leoc  1900  isio 

Fio.  15.  — Italy 


i  -'I        THE   HISTORY  OF  PRICE  LEVELS 

aloiM',  from  71  to  111.  That  is,  in  24  ytun  prices 
iruTt'asrd,  acconliii^;  to  one  calculation,  by  one- 
third  ;  according  to  another,  by  one-half.     A  sim- 


!! 


\ 

\ 

\ 

^^ 

\ 

f\ 

\     ( 

^ 

\ 

f 

—\r- 

V 

AV 

N 

A" 

1 

\) 

H/ 

k 

/ 

V 

1 

r4 

l/ 

00 

40 

il) 

JB65      70  ao  SO  ISOO 

Flu.  10.  —  Austria 


10 


ilur  rise  occurred  in  the  other  countries  for  which 
there  are  statistics  covering  this  period,  namely, 
Germany,   France,  and   the   United    States.     This 

171 


I 


f 


fp 


ir 


$ 


4 


n !: 


It 


WHY    IS   THE    DOLLAR    SHRINKING?     [Ch.  X. 

rise  was  presumably  in  consequence  of  the  gold 
inflation  following  the  famous  California  gold  dis- 
coveries in  1849  and  Australian  discoveries  in  1851 

and  1852.  The  simulta- 
neous rapid  development  of 
banking  contributed  to  the 
same  result. 

4.  Between  1873 and  1896 
prices  fell  in  all  countries 
using  the  gold  standard,  as 
the  diagrams  show.  This 
fall  w^'  presumably  due  to 
the  slackening  in  the  pro- 
duction of  gold;  to  the 
adoj)tion  of  the  gold  stand- 
ard b\  nations  previously 
on  a  silver  basis,  and  the 
consequent  withdrawal  of 
gold  by  these  new  users 
from  the  old  ;  to  the  arrest 
of  the  expansion  of  silver 
money  consequent  on  the 
closure  of  mints  to  silver; 
to  the  slackening  in  the 
growth  of  banking ;  and  to 
the  ever  present  growth  of 
trade. 

During  the  long  fall  of  prices  from  1873  to  1896, 
country  after  country  ad()i)ted  the  gold  standard. 
Germany  adopted  the  gold  standard  in  1871-1873, 

172 


J 

V 

r 

r 

^ 

N 

r 

<^ 

n 

^^ 

\ 

J 

1890  1900 

Fig.  17.  —  Spain 


1910 


i  i  I 

■  ill 


ii 


§  2.]        THE   HISTORY   OF   TRICE   LEVELS 


too 

ISO 

\ 

160 

1 

\ 

1 

\ 

1 

A 

A 

y 

^ 

\ 

liO 

\ 

V 

\ 

\ 

I 

\ 

f\ 

\ 

l\ 

A 

A 

100 

1 

\ 

V 

, 

r\ 

A 

1 

V 

\ 

\ 

r\. 

l\ 

/v 

r 

eo 

\ 

y 

\ 

h 

\ 

J 

60 

-K 

10 

i 


il 


I) 


f" 


fOeo  70  eo  30  1900 

Fiu.  1^.  —  Australiii 


10 


s    IS 


WHY   IS  THE   DOLLAR  SHRINKING?    [Ch.  X. 


I  r: 


thus  helping  to  render  impossible  the  maintenance 
of  bimetallism  by  the  Latin  Union  (France,  Bel- 
gium, Switzerland,  Italy,  and  Greece).  The  Scan- 
dinavian monetary  union  adopted  the  gold  standard 
in  1S73.  Between  that  date  and  1878  the  countries 
of  the  Latin  Union  suspended  the  free  coinage  of 
silver  and  came  practically  to  a  gold  basis.  In  the 
United  States  the  demonetization  of  silver  in  187.3, 
the  so-called  "crime  of  73,"  signified  that  with 
resumption  (which  took  place  in  1879),  the  country 
would  come  to  a  gold  basis.  The  Netherlands 
virtually  adopted  the  gold  standard  in  1875-1876, 
Egypt  in  1885,  Austria  in  1892,  India  in  1893,  Chili 
in  1895,  Venezuela  and  Costa  Rica  in  1896,  Russia, 
Japan,  and  Peru  in  1897,  Ecuador  in  1899,  ^Mexico 
in  1905.  In  fact,  most  countries  of  importance  have 
now  definitely  adopted  the  gold  standard. 

The  figures  given  in  the  preceding  table  apply 
only  to  gold  countries.  But  about  1873  gold  and 
silver  parted  company;  bimetallism  ceased  to  hold 
them  together.  It  is  interesting,  therefore,  to  ask 
whether  the  movement  of  prices  in  silver  countries 
continued  like  that  in  ''Id  countries.  We  find  it 
did  not,  as  already  pointed  out  on  the  diagrams  of 
India  and  Japan,  and  as  was  to  be  expected  by  those 
who  realize  that  price  movements  have  a  monetary 
side.  Prices  rose  in  India,  as  shown  by  the  relative 
index  numbers,  from  107  in  1873  to  140  in  1896 ;  in 
Japan  from  104  in  1873  to  133  in  1896;  and  in 
China  from   100  in   1874  to  109  in  1893.    These 

174 


§  2]       THE  HISTORY  OP  PRICE  LEVELS 


'36t  70  go  90  1900  7o^ 

Fio.  19.  — New  Zealand 

175 


1^  \ 


ii:';. 


if:/t 


.?>'■• 


1 


f 


i 


II 

if 
if!. 


^'.!t 


Mi 


WHY   IS  THE   DOLLAR  SHRINKING?     [Ch.  X. 

figures,  although  not  as  reliable  and  representative 
as  the  figures  for  gold  countries,  agree  with  each 
other  in  indicating  a  rise  of  prices  in  silver  countries. 
The  amount  of  rise  is  differently  indicated,  ranging 
roughly  from  10  per  tt  t  to  35  per  cent.  The  fol- 
lowing table  shows  the  general  contrast  between 
prices  in  gold  and  silver  countries  as  between  1873- 
1876  and  1890-1893,  the  last  year  being  that  of  the 
closure  of  the  Indian  mint  to  silver. 


We  see  that  prices  in  the  gold  countries  fell  a  little 
more  than  20  per  cent,  while  prices  in  silver  countries 
rose  a  little  less  than  20  per  cent.     If  some  way  had 
been  contrived  by  which  gold  and  silver  could  have 
been  kept  together  (say  by  world-wide  bimetallism), 
prices  would  not  have  fallen  so  much  in  gold  coun- 
tries, or  risen  so  much  (if  at  all)  in  silver  countries. 
After  Japan  joined,  and  India,  in  effect,  rejoined 
the  gold  nations,  in  the  '90's,  the  price  movements 
of  these  two  countries  have  corresponded  with  those 
of  other  gold-standard  countries.    As  to  statistics 
earlier   than   1873  there  seem   to  be  none   avail- 
able for  the  Orient  except  those  of  Robertson  for 
India  which  begin  with  1861.     These  show  some 
similarity   between   the    price   movements   of    the 

176 


§  L.]       THE  HISTORY  OF  PRICE  LEVELS 


period  1861-1873  in  India  to  the  price  movements 
in  the  western  world  at  that  period.     It  would  be 


Fiu.  20.  —  New  South  W.-Ues 

interesting  if  some  student  of  Japan  would  work  out 
index  numbers  earlier  than  1873.     We  could  thus 
N  177 


i.  I 


'  < 


I 


■'A 
•.Hi 


'ill 


nil 

■  ill' 


WHY   IS  THE    DOLLAR   SHRINKING?     [On.  X. 

tell  whether  in  that  early  period,  when,  because  of 
French  bimetallism,  the  Orient  and  the  Occident  en- 
joyed a  stable  par  of  exchange,  the  Oriental  and 


iB7e 


so  so  1300 

Fio.  21.  —  Japan 


Occidental  price  movements  corresponded  or  not. 
But  so  far  as  \v"  have  data  to  tell  us,  we  find  that 
the   Oriental  and   Occidental  prices  moved  apart 

178 


§  2.1       THE  HISTORY  OF  PRICE  LEVELS 


when  their  monetary  standards  moved  apart,  but 
moved  together  when  their  monetary  standards  were 
the  same.     Nothing  could  better  illustrate  the  para- 


mo 


60  30  1900 

Fio.  22.  —  India 


mount  influence  of  the  monetary  standard  on  price 
movements. 

5.  From  1896  to  the  present,  prices  have  been 
ri.3ing.  The  causes  which  have  produced  this  rise 
and  which  are  still  at  work  will  be  discussed  in  the 
next  section. 

179 


- 


W 


*  »5 


WHY   IS  THE   DOLLAR   SHRINKING?    [Ch.  X. 


«". 


m 


§  3.  The  Present  Price  Movement 

We  come  now  to  the  upward  movement  of  prices, 
beginning  with  1896  or  1897,  which  has  given  rise 
to  the  present  world-wide  complaint  over  the  "high 
cost  of  living."  This  upward  movement  is  in  sharp 
contrast  with  the  downward  movement  occurring  in 
the  period  between  1873  and  1896.  During  the  last 
eighteen  years  in  every  country  for  which  we  have 
statistics — all  gold-standard  countries — prices  have 
risen  rapidly.  This  is  shown  by  the  diagrams  al- 
ready given.  As  these  diagrams  indicate,  the  rise 
of  prices  between  1896  and  1913  has  been  ap- 
proximately 65  per  cent  for  Germany,  50  per  cent 
for  the  United  States,  45  per  cent  for  Canada  and 
France,  and  35  per  cent  for  England. 

As  is  evident,  statistics  do  not  all  agree  as  to 
the  extent  of  this  movement,  but  they  do  all  agree 
as  to  its  direction. 

Their  agreement  in  this  regard  would  probably  be 
even  closer  than  it  is,  if  the  same  system  of  sta- 
tistics Vi'ere  used  in  all  countries.  That  this  is  true 
may  be  reasonably  inferred  from  the  fact  that  two 
different  statistical  method?  applied  to  the  same 
country  often  show  as  great  a  difference  as  the  dif- 
ferences found  among  different  countries.  For  in- 
stance, the  statistics  of  price  movements  in  Canada 
and  the  United  States  are  not  as  dissimilar  as  are 
those  of  Sauerbeck  and  the  Board  of  Trade  for  Eng- 
land or  of  the  "Hooker"  and  the  "Hamburg"  sta- 
tistics for  Germany. 

180 


§3]         THE   HISTORY  <JF  PRICE    LEVELS 


Of  course,  some  prices  have  not  risen  but  have 
actually  fallen.  Others  have  risen  much  more  than 
the  average.  This  is  particularly  true  of  agricul- 
tural and  forest  products.  Their  prices  have  nearly 
doubled.  The  prices  of  securities  have  also  moved, 
some  up  and  some  down.  Bonds,  both  public  and 
private,  have  fallen.  Good  stocks,  in  general,  have 
risen.  We  must  not  make  the  mistake  of  looking 
at  the  prices  of  particular  commodities  when  our 
question  is  one  of  the  general  price  level. 

Neither  must  we  confuse  the  issue  by  cheap  apho- 
risms such  as  that  which  would  make  us  believe  there 
is  no  high  cost  of  living,  but  only  a  "cost  of  high 
living."  While  there  can  be  no  question  that  stand- 
ards of  living  have  advanced,  there  can  be  no  reason- 
able doubt  that  prices  have  risen;  in  other  words, 
that  the  actual  cost  of  buying  a  given  quantity  of 
staple  commodities  is  greater  to-day  than  it  was 
eighteen  years  ago ;  or  in  still  other  words  that  the 
purchasing  power  of  the  dollar  has  fallen. 

Again  it  may  be  true,  and  probably  is,  that  the 
purchasing  power  of  our  incomes  taken  as  a  whole, 
has  increased,  so  that  we  actually  have  more  goods 
than  formerly.  But  if  so,  this  is  not  because  prices 
are  any  lower,  i.e.,  because  the  purchasing  power  of 
the  dollar  has  increased,  but  because  the  number  of 
dollars  in  our  income  has,  on  the  average,  increased.' 

The  broad  fact,  then,  is  that  prices  are  rising  all 

•For  facts  concerning  the  wage-earner,  however,  see 
Append!.^  to  this  Chapter. 

181 


I 


'-r 


WHY    IS  THE    DOLLAR   SHItlNKlNO?    [Cu.  X. 

over  the  world.  And  unything  that  is  happei.iiiK 
all  over  the  world  it  would  seem  must  have  a  world- 
wide cause. 

The  only  cause  which  fits  in  with  the  principles 
governinf?  price  levels  as  well  as  with  all  previous 
human  experience  is  t>j//o/ion  —  inflation  of  money 
and  of  credit  currency.  In  fact,  the  rise  of  prices 
in  the  United  States  for  which  we  have  the  fullest 
statistics  is  ahm)st  exactly  what  we  should  expect 
and  could  calculate  from  tlie  known  changes  hi 
money,  deposits,  their  velocities,  and  trade.' 

For  the  last  eighteen  years  we  are  able  to  construct 
for  the  United  States  fairly  accurate  estimates  of  all 
the  factors,  M,  M',  V,  V,  P,  T,  in  the  equation  of 
exchange.  The  statistics  of  the  magnitudes  for  the 
eighteen  years  mentioned  are  all  represented  in  Figure 
23.  In  this  diagram  the  equation  of  exchange  for 
each  year  is  represented  by  the  mechanical  balance 
described  in  a  previous  chapter. 

We  note  that  in  the  years  considered  every  factor 
has  greatly  increased.  The  quantity  of  money  in 
circulation  (J/),  represented  by  the  purse,  has  about 
doubled  ;  bank  deposits  subject  to  clieck  (M'),  rep- 
resented by  the  bank-book,  have  about  trebled  ;  the 
volume  of  trade  (T),  represented  by  the  weight  at 
the  right,  has  increased  about  two  and  a  half  fold; 

>For  full  discussion  see  Irving  Fisher,  The  Purchasing 
Power  of  Money,  Chapter  XII  and  Appendix  to  Chap- 
ter XII ;  also  articles  on  "  The  Efiuation  of  Exchange  "  in 
The  American  Economic  Review,  for  Juno,  1911,  1912,  1913, 
and  1914. 

182 


v:7 


' 


CitiJ  ^  A  »'. . 


£;iii^  . -.JEPTa 


f 


^■■■■■■■iii 


Ji_ij 


'^sm^k: 


§  3]       THE  HISTORY   OF  PRICE  LEVELS 


the  velocity  of  circulation  of  money  (F),  repre- 
sented by  the  leverage  of  the  purse,  or  its  distance 
from  the  fulcrum,  has  increased  slightly;  and  the 
velocity  of  circulation  of  bank  deposits  (V),  repre- 
sented by  the  leverage  of  the  bank-book,  has  in- 
creased about  fifty  per  cent. 

As  the  net  result  of  these  changes,  the  index 
number  of  prices  (P),  or  the  leverage  of  the  weight 
at  the  richt,  has  increased  about  two-thirds.  The 
price  level  of  !!]()•)  is  taken  as  100  per  cent.  On 
this  scale  the  price  level  of  ISflii  is  GO  per  cent,  and 
that  of  the  other  years  as  indicated.^ 

Let  us  express  the  matter  in  terms  of  cause  and 
effect.  The  diagram  affords  a  picture  of  the  fact 
that  increases  in  money  and  deposits  and  in  their 
velocities    (represented,    respectively,    by    the    in- 


'f- 


•  The  total  increase  from  1896  to  the  present  is  about  75 
per  cent,  whicli  is  more  than  the  increase  of  wholesale 
priees.owingprincipally  to  the  fact  that  the  present  statistics 
include,  besides  wholesale  prices,  the  prices  of  shares.  The 
volume  of  trade  for  any  year  is  represented  as  the  number 
of  "dollars'  worth"  on  the  basis  of  the  prices  in  1909. 
Thus  tlie  actual  value  of  trade  in  1909  was  S 387,000,000,000, 
i.e.,  .387  billion  units  of  goods  of  various  kinds  the  units 
being  such  as  to  be  each  worth  one  dollar  in  1909.  The 
trade  in  1912  was  4.")0,00(),()(M),0{X)  of  ^/u.se  same  unils  (i.e., 
such  as  were  worth  SI  each  in  1909).  Similarly,  the  trade 
in  \y'M\  was  191.000,(X)0,(HM)  of  these  units.  As  the  inde.x 
niiml)er  of  prices  shows  that  the*  price  level  of  1890  was 
only  about  (10  jxt  ci-nt  of  the  pri<'t)  level  of  1909,  the  actual 
value  of  the  tra(lt>  in  189b  was  oidy  SlH.i'(K),tR)O.()00. 
This  is  /'?'  for  ISOO,  i.e..  191  billion  tmits  (each  worth  SI 
ill  I'.tO'.l.)  at  tiO  ct'iil:-;  ly.n-h.,  tlic  pricM  ot  a  iinjt  in  1896, 

183 


it 
1 


SI'' 


'•* 


.4 


WHY    IS   THE    DOLLAR   SHRINKING?     [Oh.  X. 

creased  vveiglits  of  purse  and  bank-hook,  and  their 
increased  distances  from  the  fulcrum)  have  necessi- 
tated an  increase  in  average  prices  (represented  by 
tlie  increased  distance  of  the  tray  from  the  fulcrum) 
in  spite  of  the  increased  volume  of  business  which 
has  been  transacted  (represented  by  the  increased 
weight  of  the  tray). 

For  other  countries  than  the  United  States,  we 
have  no  corresponding  exact  statistics  for  the  five 
factors  in  the  equation  of  exchange.     We  do  '.now, 
however,  in  a  general  way  that  the  money  y.,I)  in 
the  civilized  world  has  been  increasing  rapidly.     We 
have  a  few  statistics  as  to  money,  both  metallic  and 
paper.     Edmond  Thery   in   a   recent   article,  the 
English  translation  of  which  is  published  in   The 
Market   World   and   Chronicle  for  April    18,    1914, 
shows    that    the    gold    money    in    the    world    in- 
creased 54%  between    1902   and    1912.     He    also 
points  out  that  the  bank  notes  of  European  banks 
of  issue  increased  from  S:i,130,00(),00()  to  S4,SG0,- 
0()0,()()0  between  1902  and  1912,  an  i.icrease  of  55%. 
A  study  by  the  writer'   indicates  that  the  total 
money  in  circulation  in  the  gold  standard  world 
has  in  recent  years  been  increasing  at  the  average 
rate  of  2\  %  per  aniuuu. 

We  know  also  thai  deposits  subject  to  check 
{M')  have  greatly  expanded.  In  the  writer's  article 
just  referred  to,  statistics  Jiave  been  given  to  show 

'  .1  mrrican  Erounmic  RrHrir.  Scptfrrhor,  1012  "Will  the 
Present  Upward  Trend  of  World  Prices  C'ontinm  ?  " 

184 


5  3]       THE  HISTORY  OF  PRICE   LEVELS 

that  deposits  subject  to  check  have  in  recent  years 
been  increasing  in  the  gold  standard  world  at  the 
rate  of  8  %  per  annum.     Thery  estimates  that  com- 
mercial bills  held  by  the  banks  of  Europe  increased 
between  1902  and  1912  from  about  nine  billions  of 
dollars  to  about  fifteen  billions  of  dollars,  an  increase 
of  69  per  cent  or  an  average  increase  of  nearly  6 
per   cent   per   annum.     These    figures   are    rough 
estimates,  but  are  regarded  by  M.  Therj-  as  sub- 
stantially correct.     While   they   are  estimates  of 
commercial  bills  or  bank  loans  and  not  of  deposits 
subject  to  check,  it  is  altogether  likely  that  the  in- 
crease in  the  latter  is  at  least  as  great. 

The  writer's  article  also  shows  that  there  is  reason 
to  believe  that  the  velocities  of  circulation  of  money 
and  deposits  have  increased,  though  it  is  impossible 
to  state  at  what  exact  rates. 

In  the  same  article,  the  volume  of  trade  has 
been  estimated  to  have  increased,  but  at  a  con- 
siderably slower  rate  than  the  expansion  of  money 
and  deposits. 

We  see  then  that  the  more  exact  our  data  the 
more  exactly  do  they  corroborate  our  theory  that 
prices  have  risen  because  of  gold  and  credit  inflation. 


if 


f^     ; 


185 


APPENDIX   TO  CHAPTER    X 


The  main  object  of  this  book  is  to  study 
the  purchasing  power  of  the  dollar  and  not  the 
number  of  dollars  in  incomes,  but  for  the  informa- 
tion of  the  reader,  Figure  24  is  given,  which  shows 
for  the  United  Statco,  according  to  the  best  data 
we  have,  the  course  of  wholesale  prices,  retail  prices, 
and  money  wages.  The  dan  ine  shows  the  course 
of  money  wages  from  1840  to  1907,  the  last  date 
for  which  our  Bureau  of  Labour  has  published 
general  wage  statistics.  Comparing  this  curve  with 
the  curve  for  wholesale  prices,  we  derive  the  follow- 
ing facts : — 

(1)  Between  1840  and  the  outbreak  of  th'^  CiNii 
War,  wages  increased,  while  prices  decreased,  so 
that  the  wage-earner  gained  in  real  wages. 

(2)  During  the  Civil  War,  prices  shot  up  far 
faster  than  wages,  so  that  the  workman  lost.  After- 
ward, prices  fell  more  rapidly  than  wages,  so  that 
the  workman  gained. 

(3)  Between  1879  and  1896,  money  wages  rose, 
while  prices  fell,  so  that  the  workman  a-yiin  gained. 

(4)  Since  189(5,  prices  have  increased  faster  than 
wages,  so  that  the  workn  an  has  lost.  This  is  espe- 
cially tnu'  of  rt'tail  prices,  the  figures  for  which  in 

\m 


m^^i^,mm^iii0^m:w..  m 


Fig.  21.  —  United  States  >j  I{ctail  prices 


18: 


^  90  1900 

Whnlesali'  prices  ] 
^  I{.'tail 
[Wage. 


If     ' 


i       i 


Kfl 


\V 


WHY    IS  THK    DOLLAR   SHRINKING?    [Ch.  X. 

iuiditioii  to  those  for  wholesale  prices  are  available 
since  1890,  and  are  shown  by  the  dotted  curve. 

It  will  be  seen  that  in  general  prices  move  more 
rapidly  than  w.iges,  whether  the  movement  is  up- 
ward or  downward.  This  tendency  of  wages  to 
lag  behind  prices  puts  the  wage-earner  into  the 
gaining  class  during  a  period  of  falling  prices,  and 
into  the  losing  class  during  a  period  of  rising  prices 
such  as  the  present. 

We  have  no  statistics  for  the  incomes  of  any 
class  other  than  wage-earners,  but  statistics  as  to 
production  and  consumption  of  goods  would  indicate 
that  the  average  income  of  all  classes  has  increased. 


188 


fam'iiT      * 


miK 


CHAPTER   XI 

CONFUSIONS  CONCf:r{NING  PRESENT  PRICE  MOVEMENT 

§  1.  Fallacies  Underlying  Popular  Explanations  of 
the  High  Cost  of  Living 

If  the  analysis  we  have  given  is  correct,  the 
shrinkage  in  the  dollar,  amounting  to  more  than  one- 
third  in  the  last  eighteen  years,  is  due  to  the  in- 
flation of  money  and  credit,  or,  in  other  words,  to  the 
fact  that  the  means  for  conducting  trade  have 
outrun  the  volume  of  trade  to  be  conducted  thereby. 
This  conclusion  not  only  fits  our  analysis  in  the 
abstract,  but  fits  the  facts  as  we  find  them.  These 
show  that  the  use  of  money  and  checks  has  in- 
creased in  the  United  States  at  an  average  rate  of 
0  i)er  cent  per  annum,  while  trade  has  only  in- 
creased at  the  rate  of  ^  per  cent  per  annum,  thus 
accounting  for  the  actual  increase  of  prices  of  S^ 
per  cent  per  annum. 

But  we  cannot  satisfy  objectors  to  this  conclusion 
unless  we  meet  their  objections  on  their  own  ground. 
Most  people  argue  tiie  problem  of  the  high  cost  of 
living  on  entirely  wrong  principles.  They  try  to 
cxi)lain  the  rise  in  general  pri  js  by  the  same  sort 
of  reasoning  as  they  are  accustomed  to  use  in  trying 
to  explain  the  rise  of  price  of  some  particular  ar- 

189 


i. 


:|M. 


•f  r. 


..S^TTi, 


WHY    IS   tub:    dollar   SHRINKINO?     [Ch.  XI. 

tide.  They  do  not  realize  one  of  the  truths  which 
this  book  has  aimed  to  make  clear,  that  it  is  as 
futile  to  explain  a  general  rise  of  prices  hy  app)eal- 
ing  to  the  particular  forces  affecting  particular  prices, 
as  it  would  be  to  explain  a  rise  in  the  ocean  tides  by 
appealing  to  the  forces  which  make  the  waves.  To 
change  the  simile,  the  people  who  look  to  a  micro- 
scopic study  of  each  individual  commodity  in  order 
to  understand  the  general  movement  of  all  com- 
modities "cannot  see  the  woods  for  the  trees."  To 
again  change  the  simile,  we  cannot  assume  that  the 
rise  of  a  particular  price  pulls  up  the  general  level 
of  i)rices  with  it  any  more  than  we  can  assume  that 
a  man  who  walks  upstairs  pulls  the  earth  up  with 
him.  The  man  really  pushes  the  earth  down  an 
infinitesinud  distance  and  the  centre  of  gravity  of 
himself  and  the  earth  together  r(>mains  unaffected. 
If  it  were  worth  while,  we  could  show  that  in  some 
cases  (not  all)  a  rise  in  a  particular  price  tends  to 
push  down  the  general  level  of  other  prices.  For 
instance,  scarcity  of  food,  while  it  tends  to  raise 
food  prices,  tends  to  lower  the  prices  of  other  things, 
for  it  causes  more  income  to  be  spent  for  food,  and 
so  leaves  less  income  for  otiier  things,  which  in  turn 
causes  a  less  effective  demand  for  these  other  things. 
Another  sununary  way  of  disposing  of  the  problem 
is  to  say  that  "supply  and  demand  explain  every- 
thing," meaning  that  <-ach  iidividual  price  is  thus 
determined  and  that  these  together  form  the  general 
price  level.     But  those  who  appeal  to  supply  and 

190 


m^^m^i.^^:':A:L{!:mmi§^mM:Ai. 


i  2]  PRESENT  PRICE  MOVEMENT 

demand  to  avoid  the  need  of  appealing  to  monetary 
factors  leave  out  of  aecounc  a  very  important  in- 
stance of  supply  and  deman<l,  I.e.,  the  supply  and 
demand  of  gold.     They  forget  that  the  supply  and 
demand  of  gold  cannot,  under  our  present  system, 
affect  the  pric-e  of  gold  itself,  for  the  price  of  gold  is 
fixed  by  the  weight  of  our  gold  dollar  (25.8  gr.)  at 
the  number  of  times  this  weight  is  contained  in  an 
ounce  of  gold  {I.e.,  an  ounce  (or  480  gr.)  -v-  a  dollar 
(or  25.S  gr.)  =  §18.00)  so  that  the  price  of  standard 
gold   (i^o   fine)  must  always  be  SIS.OO    per  ounce. 
This  arbitrary  fixation  of  the  price  of  gold  prevents 
absolutely  the  natuial  effect  from  an  increased  supply 
of  gold.     If  the  supply  of  silver  is  increased,  it  tends 
to  lower  the  price  of  silver,  but  an  increase  in  the 
supply  of   gold    cannot    lower  the   price    of   gold. 
Since  the  increased  supply  of  gold  cannot  lower  the 
price  of  gold,  it  takes   its  revenge,  as  it  were,  by 
raising  the  prices  of  other  things  expressed  in  gold. 

§  2.  Popular  Explanations  or  the  High  Cost  of  Living 

In  order  to  leave  no  argument  unanswered,  let  i;s, 
for  a  moment,  look  at  the  other  reasons  ordinarily 
given  for  the  high  cost  of  living :  the  tariff,  the  trusts, 
the  labour  unions,  shortened  hours  of  labour,  the 
nnddleman.  coiw  storage,  longer  hauls  on  railroads, 
marketuig  by  telephone,  the  free  delivery  system, 
th-  individual  package,  the  enforcement  of  sanitary 
laws,  the  tuberculin  testing  of  cattle  and  the  destruc- 
tion of  tainted  ?neat,  sanitary  milk,  advertising,  uii- 

191 


^'^ 
.i\i 


u 


WIIV    IS   THE    DOLLAR   SHRINKING  ?     [Ch.  XI. 

s(  ientific  maiiaj?oinont,  the  elimination  of  renovated 
butter,  and  of  "rots"  and  "spots"  in  ejjj^s,  food 
jidulteration,  wars,  armaments,  extravaganee,  con- 
centration of  population  in  cities,  impoverisiiment 
of  the  soil,  the  displacement  of  the  neighbourhood 
farmer,  the  fact  that  farmers'  wives  no  longer  com- 
pete in  butter  making  or  poultry  raising,  droughts, 
and  the  high  cost  of  land. 

We  shall  take  up  briefly  these  alleged  causes  in 
the  order  above  named. 

As  to  the  tariff,  it  is  quite  true  that  the  imposition 
of  a  tarifT  tends  to  "dam  up"  the  money  in  a  coun- 
try and  so  to  raise  the  level  of  prices,  as  has  been 
explained  in  jjrevious  chapters.  But  needless  to  say, 
this  way  in  which  the  tarifi'  affects  the  price  level  is 
quite  foreign  to  the  thought  of  those  who  would  fix 
the  responsibility  on  the  tariff.  They  believe  that 
the  tariff,  quite  irrespective  of  an>-  effect  on  the 
quantity  of  money,  tends  to  keep  i,  lividual  prices 
high  (as  indeed  it  does  in  some  cases)  and  therefore 
(they  imagine)  to  raise  the  general  price  level.  As 
we  have  seen  in  the  last  section,  this  reasoning  from 
individual  to  general  prices  is  fallacious.  Moreover 
the  American  tariff  cannot  be  held  responsible  for 
the  world  rise  of  prices  with  which  we  have  to 
deal.  Prices  have  risen  in  countries  both  with 
higi\  tariffs  and  with  low  tariffs. 

Similarly,  the  trusts  cannot  be  held  responsible 
for  the  rise  of  prices  throughout  the  world.  Prices 
have  risen  in  countries  with  and  in  countries  with- 

192 


s 


I'HKSKNT    I'UICK   MOVEMENT 


out  trusts.  Moreover,  trust-miidr  gooils  hiivr,  iij)- 
puriMitly,  risi-ii  in  prl.r  nitluT  less  tliaii  goods  in 
gfiuTiil.  It  is  trui',  iK.wi'vcr,  that  trusts  liavt-,  in  the 
I'liitcd  States,  j,'rcatly  increased  the  su|)j)ly  of 
neKotiahh'  securities  which  have  been  utilized  as 
eolhiteral  securities  for  hank  loans  and  hecoine  the 
basis  for  deposits,  thus  aiding  in  credit  inflation. 
liut  this  manner  in  which  trusts  have  tended  to 
raise  ])rices  is  again  quite  foreign  to  the  thought 
of  those  wlu^  would  fix  the  res{H)nsil)ility  on  trusts. 
They  assert  that  trusts  raise  prices  arbitrarily  and 
that  what  they  can  do  toward  raising  individual 
prices  tends  to  raise  the  general  price  le\el. 

Nor  can  labour  unions  and  their  attempts  to  re- 
strict output  be  held  resjjonsible  for  so  gigantic  an 
effect  as  that  with  which  we  have  to  deal.  For,  in 
the  first  place,  labour  unions  are  not  a  phenomenon 
of  the  last  decade  and  a  half,  but  existed  in  the  pre- 
vious period  of  falling  prices  ;  and  secondly,  any  effect 
<lue  to  labour  unions  in  the  last  eighteen  years  would 
be  confined  to  the  United  States,  England,  and  a  few- 
other  places  where  they  have  grown  in  activity  in 
that  period  and  could  not  be  held  responsible,  for 
instance,  for  the  rise  of  prices  in  India. 

The  reduction  in  the  hours  of  labour  might  con- 
ceivably, by  reducing  fatigue  and  so  increasing  tiie 
im)ductivity  of  labour,  increase  the  volume  of  trade 
and  M)  tend  to  reduci'  rather  than  raise  prices.  But 
trade  unions  are  making  the  mi.>take  of  using  short- 
ened hours  as  a  means  of  limiting  the  output.  It 
o  193 


I! 


ft- 


WHY    IS  THK    DOLLAR   SHItlXKINd?     [Cii.  XI. 


.'( 


is  a  part  of  tluir  sclt'-iiijurinj,'  "  k<>  t'^^^'  "  IM»lify. 
This,  of  coursf,  has  a  tt'iulciicy  to  rnlu<r  thr  vcihimc 
of  traih'  and  to  raist-  pricrs  in  acrordaiKr  with  the 
equation  of  oxrhaiigo.  Yet  we  cannot  oxjjhiin  the 
rise  in  tlie  cost  of  Uvinj;  hy  a  reduction  in  the  vol- 
ume of  trade,  for,  as  a  matter  of  fact,  the  volume 
of  trade  has  not  be     reduced. 

The  middleman  ha.-,  come  in  for  mucli  bhimc  in  the 
hist  few  years.  Whether  as  a  wiiole  the  middleman's 
profits  are  greater  than  formerly  is  a  fair  (piestion. 
Granted,  for  the  sake  of  a'-j^ument,  tiiat  in  the  hist 
eighteen  years  tlie  middleman's  profits  have  greatly 
increased,  not  only  absolutely,  but  relatively  to  the 
rise  of  prices,  the  effect  would  simply  be  that  of  a 
wedge  driven  between  retail  and  wholesale  prices. 
But  here  again,  whatever  the  theoretical  tendency, 
the  facts  do  not  show  any  considerable  wedging  apart 
of  wholesale  and  retail  prices.  Wholesale  prices  have 
certainly  not  fallen,  out  risen,  and  they  seem  to  have 
risen  in  general  almost  as  fast  as  retail  prices. 

Cold  storage  has  been  blamed  simply  because  at 
certain  seasons  of  the  year  the  indignant  customer 
has  been  told  by  the  retailer  that  he  cannot  lower 
prices  so  long  as  the  cold-storage  people  are  with- 
holding great  quantities  of  goods.  As  a  matter  of 
fact,  hoAcver,  taking  the  year  round,  the  efl'ect  of 
cold  storage  is  not  to  raise  prices,  but  simply  to  even 
prices,  raising  them  in  certain  seasons  wiien  they 
would  otherwise  be  low  and  lowering  them  in  other 
seasons  when  they  would  otherwise  be  high. 

194 


I  ^1 


PHKSKXT  VnWE  MOVKMENT 


Ix)n>,'rr  hauls  on  railnmds,  the  trlcphoiii',  free  de- 
'jvt'ry  H(T\  ice,  tlic  individual  packu^T.  the  enforce- 
ineiit  of  sanitary  laws,  tiiherculin  ti-stinj;  of  cattle 
and  the  dcstru(ti(»n  of  tainted  nicut,  sanitary  niiik, 
advertising,  unscientiHc  inanau'ement,  the  elimina- 
tion of  renovated  hiitter,  and  of  ntts  "  and  "  s{K)ts  " 
in  eg^s,  are  all  alleged  reasons  for  an  increase  in  the 
cost  of  pntduction.  We  may,  for  brevity,  overlook 
the  fact  that  many  of  these  changes  improve  the 
quality  and  so  give  the  consumer  a  quid  yro  quo. 
But  we  cannot  overlook  the  fact  that  these  alleged 
increases  in  the  cost  of  production  must  either  be 
very  small  of  themselves,  or  nuist  be  more  than 
offset  by  economies  elsewhere  in  production,  for  the 
simple  reason  that  the  actual  cost  of  producing 
goods  to-day,  in  terms  of  labour,  is  undoubtedly  less 
than  it  was  eighteen  years  ago.  We  must  not 
measure  the  cost  of  production  in  money  simply, 
without  takiiH'  into  account  the  loss  in  the  purchas- 
ing power  of  the  dollar.  Otherwise  we  shall  be 
reasoning  in  a  circle,  and  merely  trying  to  explain 
the  rise  of  prices  of  goods  by  means  of  the  rise  of 
prices  of  labour,  or  vice  ccrsa. 

Of  all  the  alleged  explanations  of  the  high  cost 
of  living,  none  are  more  shallow  than  those  which 
explain  it  in  terms  of  high  money  costs  of  produc- 
tion. Such  an  explanation  merely  explains  one  price 
in  relation  to  another  price.  It  is,  of  course,  true 
that  many  prices  are  related  to  ca(  h  other.  The 
price  of  bread  and  the  price  of  wleat  are  related  to 

195 


I'i 


ic 


ii 


WHY    IS   THE    DOLLAR   SHRINKING?     [Cii.  XL 

each  Dthcr  and  must  always  move  In  sympathy. 
One  of  these  prices  cannot  ^;>  up  very  much  with- 
out the  other  jjoinj^  up  also,  hut  when  the  baker 
tell  us  that  bread  has  risen  ui  price,  because  of  the 
rise  in  the  price  of  wheat,  he  has  not  explained  the 
rise  of  either  bread  or  wheat,  ile  has  merely 
shoved  the  ex])lanation  on  to  something  outside  of 
his  own  business.  It  is,  of  course,  a  part  of  a  busi- 
ucss  man's  duty  to  look  at  *he  immediate  causes 
affecting  the  prices  with  wlii.h  he  deals,  but  if  we 
want  an  explanation  of  price  mov(>ments,  we  mu^t 
look  beyond  these  immediate  (  auses  to  remoter  ones. 
In  other  words,  ii"  the  baker  would  really  explain 
the  rise  in  the  price  of  bread,  he  nnist  explain  also 
the  rise  in  ihe  i)rice  of  wheat,  and  he  catmot  do 
this  by  again  shoving  off  the  exphination  to  another 
commodity.  Such  a  method  of  expl.ination  never 
strikes  the  root  of  the  matter.  It  continually  shifts 
the  explanation.  It  is  like  the  explanations  of  the 
old  philosophers  who  ;iid  the  earth  was  held  up  by 
a  giant.  When  asked  to  explain  what  held  the  giant 
up,  they  alleged  a  turtle  on  which  he  stood.  We 
still  need  to  know  what  holds  the  turtle  up,  and  no 
matter  how  many  stages  back  we  go,  so  long  as  we 
have  to  assume  another  snpj)orting  agent,  we  really 
get  no  fundamental  '■xj)Iaiiation.  What  we  wish  to 
exi>lain  is  the  rise  in  prices  of  things  in  general.  It 
does  not  help  us  much  when  our  grocer  tells  iis 
he  is  charging  higher  |»riees  because  he  is  charged 
higher  prices  by  .■  omc  else.     Naturally  the  rc- 

lliu 


§  2.) 


PRESENT   PRICE   MOVEMENT 


tailor  likes  to  excuse  himself  by  putting  it  oft"  oti  the 
wliol-'stiler,  and  the  wholesaler  in  turn  excuses  liim- 
-'•if  h^-  exi)lainin<,^  that  his  costs  of  production,  that 
■<>,  \\v.-  prices  he  is  charged  by  the  jobber,  have  gone 
ui..  The  jobber  in  turn  accuses  the  producer  and 
ihe  producer  points  to  his  increased  wuge  bill;  but 
even  this  does  not  give  us  any  final  result.  The 
wage-earner  tells  us  that  he  has  to  get  higher  wages 
because  of  th<-  higher  retail  prices  which  he  has  to 
I)ay.  So  this  effort  to  explain  the  high  cost  of  living 
merely  comes  around  again  to  the  high  cost  of  living 
itself. 

Such  reasoning  reminds  one  of  a  cartoon  published 
a  tew  years  ago  in  which  a  number  of  men  were 
standing  in  a  circle  each  labelled  and  each  pointing 
an  accusing  finger  at  his  neighbour  around  the  circle 
from  retailer  to  wholesaler,  jobber,  producer,  wage- 
earner,  and  retailer  again. 

Food  adulteration  is  practically  the  opposite  of 
some  of  the  above-named  {)rocesses  which  aim  to 
improve  and  not  deteriorate  the  quality  of  food. 
If  improving  foods  raises  their  price,  adulterating 
foods  with  cheap  ingredients  should  lower  their  price 
as  well  as  quality.  Exactly  b>-  what  reasoning  food 
adulteration  can  be  shown  U>  raise  the  cost  of  living 
has  never  been  explained.  Such  talk  illustrates  the 
easy  way  in  which  i)eopli'  point  to  any  current 
event  as  a  sujjposcd  causr  of  the  high  cost  uf  Hving. 
Wars  and  armament  rejjresent  a  waste,  but  a 
waste  which  has  been  going  on  far  longer  than  has 

197 


If 


I 
1 1 


I  '' 


h 


1^ 


WHY    IS   THE    DOLLAR   SHRINKING?     [Cn.  XL 

the  rise  of  prices.  Undouhtedly  tlicse  causes  tend 
to  lower  t!ic  volume  of  trade,  but  their  effect  is 
greatly  exaggerated.  This  is  evident,  not  only 
from  the  fact  that  the  volume  of  trade  has  greatly 
increased  in  s})ite  of  the  increased  expenditures  in 
times  of  jieace  for  war  armament,  but  also  by  the 
fact  tliat  any  increase  in  these  expenditures,  colossal 
as  they  seem,  are  extremely  small  compared  with 
the  volume  of  trade.  The  increase  in  war  arma- 
ment during  the  last  decade  and  a  half  may  amount 
to  a  few  hundreds  of  millions  a  year,  but  the  volume 
of  trade  amounts,  in  the  United  States  alone,  to 
nearly  five  hundred  billions. 

Instead  of  wars  being  the  cause  of  the  high  cost 
of  living,  the  high  cost  of  living  is  sometimes  a  part 
cause  of  wars.  The  world-wide  discontent  pro- 
uuced  b\-  the  high  cost  of  living  has  been  known 
specifically  to  have  caused  violence  in  bread  and 
m(>at  riots,  has  helped  overturn  political  parties, 
and  probabl.N-  has  had  some  share  in  the  rebellions 
and  wars  of  Europe.  The  Chinese  Revolution  is 
also  said  to  be  lari^ely  due  to  the  rise  in  the  price  of 
rice,  for  China  has  apparently  been  having  an  in- 
flation of  her  own. 

Extravagance  or  luxury  is  another  cause  which 
is  not  confined  to  the  las+  eighteen  years,  yet  prices 
f<"ll  in  former  times  while  luxury  existed,  just  as 
truly  as  prices  have  risen  in  recent  years. 

The  increase  in  extravagance  and  luxury  dur- 
ing   the    last     twenty    or    thirty    years  —  so    far 

198 


li'F 


§  2.1 


PRESENT  PRICE   MOVEMENT 


as  such  an  increase  has  actually  occurred  —  is 
due  partly  to  the  fact  that  in  actual  wealth  the 
world  is  more  able  to  enjoy  luxury  to-day 
than  formerly,  and  partly  to  the  fact  that  the 
rise  of  prices  itself  has  shifted  wealth  into  the 
hands  of  an  easy  spending  class.  Expanding  the 
first  of  these  two  statements  we  may  say  tliat  one 
reason  why  people  spend  more  to-day  on  automo- 
biles, electric  lights,  Lath-tubs,  etc.,  is  that  these 
modern  con\enicnc'  i  have  only  recently  been 
perfected  and  been  made  generally  available. 
Twenty  years  ago  ]>eople  did  not  spcrd  money  on 
automobiles  because  the  automobile  did  not  exist. 
The  prevalence  of  automobiles  to-day  means  inven- 
tion and  wealth,  rather  than  an  increase  in  the  spirit 
of  extravagance. 

Turning  to  the  second  reason  for  increased  ex- 
travagance, we  may  say  that,  so  far  as  there  has 
been  any  real  increase  in  this  general  direction,  it 
is  a  symptom  or  efi'ect  of  the  high  cost  of  living, 
rather  tlian  a  cause.  When  prices  arc  rising,  wages, 
interest,  and  rent  tend  to  lag  behind ;  consequently 
the  "enterpriser"  in  business,  for  a  time,  gains, 
because  these  expenses  do  not  increase  as  fast  as 
the  prices  of  his  products  increase.  The  enterpriser, 
the  speculator,  the  plunger,  who  gain  for  a  time  by 
rising  prices,  constitute  a  class  especially  prone  to 
display  and  luxury.  In  short,  those  who  would 
ascribe  the  high  cost  of  living  to  a  cost  of  high 
living  are  reversing  .ause  and  effect. 

199 


n 


l! 


'?' 


WHY  IS  tup:  doi 


sinnyKixc.?   icn.  xi. 


':H 


The  concentration  of  population  in  cities  is  sup- 
posed, by  reducing  the  inuuber  of  prochicers  and  in- 
creasing the  inimber  of  consumers,  to  have  increased 
the  cost  of  Hving.  It  is  true  that  this  migration  to 
the  city  tends  to  reduce  farm  pro(hicts,  but  the  fact 
is,  farm  pnuhicts  have  increased  nevertheless.  More- 
over the  city  dwellers  are  not  mere  idle  consumers,  but 
active  producers  of  mamifactured  and  other  goods, 
which,  however,  liave  risen  in  price  as  truly,  even  if 
not  as  much,  as  farm  products. 

As  to  the  alleged  impoverishment  of  the  soil,  the 
displacement  of  the  neighbourhood  farmer  and  the 
fact  that  farmers'  wives  no  longer  compete  in 
butter  making  or  poultry  raising,  it  is  a  great 
mistake  to  l>elieve  that  the  farm  (including  the 
farmer  and  his  family  as  productive  agents)  has, 
as  yet,  lost  in  its  power  to  feed  the  world.  The 
facts  do  not  bear  out  the  conclusion  that  there 
is  any  falling  ott'  in  the  products  of  the  farm.  On 
the  contrary,  the  figures  of  the  International  In- 
stitute of  Agriculture  at  Rome,  as  well  as  of  our 
own  Department  of  Agriculture  in  America,  lead  to 
exactly  the  ojjposite  conclusion.  It  is  true  that  the 
census  figures  for  1910  showed  a  decrease  per  capita 
in  farm  pnxhicts  as  compared  with  19(M).  But 
the  particular  contrast  between  these  two  census 
years  is  not  typical,  as  ^Nlr.  Nathaniel  C.  Murray,  of 
the  Department  of  Agriculture,  has  shown.  Sir 
George  Paish,  an  eminent  English  economist,  has 
given  statistics  for  England,  showing  that  the  produc- 

200 


lU 


§ 


PRESENT  PRICE   MOVEMENT 


tion  of  grains  taken  altogetlicr  has  increased  54  per 
cent  (luring  the  hist  eighteen  years.  This  represents 
an  increase  of  2',  per  cent  per  annum  while  the  in- 
crease in  population  has  only  been  about  1  per  cent 
per  annum.  Tak'ng  the  last  few  years  .ml  com- 
paring them  with  ihe  late  9()'s,  we  find,  both  in  this 
country  and  other  countries,  no  evidence  of  falling 
off  in  agriculture,  but  every  evidence  of  progress, 
not  only  absolutely  but  relatively  to  population. 

The  droughts  which  have  been  cited  as  causes 
of  high  j)riccs  are  too  local  and  temporary  to  bear 
examination  as  a  cause  of  a  world-wide  and  eightecn- 
year-Iong  rise  of  prices. 

A  recent  writer  emphasizes  the  high  cost  of  land, 
especially  in  cities,  the  figures  for  which  he  claimed 
"proved  absolutely"  that  the  high  cost  of  living  was 
due  to  this  cause,  but  he  quite  forgot  the  fact  that  at 
the  early  periods  with  wiiich  he  compared  the  mod- 
ern price  of  real  estate,  the  cost  of  living  was  actually 
higher  than  it  is  to-day  !  In  so  far  as  the  cost  of 
real  estate  has  really  gone  up  in  the  last  eighteen 
years,  we  must  remembe-  that  when  all  else  rises, 
the  i)rice  of  land  will  necessarily  rise  also.  This  is 
merely  one  more  example  of  the  very  common  pit- 
fall into  which  so  many  unconsciously  fall,  of  ex- 
l)laining  the  rise  of  one  price  by  the  rise  of  another. 
It  is  as  though  a  Massachusetts  fisherman  should 
explain  the  rise  of  tides  there  by  the  rise  of  tides  on 
the  Maine  coast  and  pass  this  oflF  as  an  exi)lanation 
of  the  rise  of  tides  in  general      Of  course  it  is  true, 

201 


n 


■I 
'I 

i! 


J* 

it 


a 


id 


WHY   IS  THE   DOLLAR   SHRINKING  ?     [Cu.  XL 

that  if  the  tides  rise  on  the  Maine  coast  they  must 
rise  on  the  ^Massachusetts  coast  also.  But  the  op- 
posite is  equally  true  and  neither  explains  the  rise 
of  both.  It  is  idle  to  explain  the  general  rise  from 
the  simple  fact  that  some  particular  price  has  risen. 
What  we  must  seek  is  the  fundamental  cause  raising 
all  prices. 

That  cause,  we  have  seen,  is  inflation,  both  of 
money  and  of  credit.  This  is  well  recognized  by 
most  students  of  the  subject,  but  is  not  yet  recog- 
nizctl  by  the  general  public,  partly  because  they 
are  misled  by  the  fallacies  and  careless  statements 
which  we  have  just  been  discussing,  and  still  more 
because  they  do  not  understand  cither  the  princi- 
ples which  affect  the  purchasing  power  of  the  dol- 
lar or  the  facts  oi  human  historv. 

It  has  been  the  aim  of  this  book  to  set  forth,  as 
simply  as  possible,  these  principles  and  facts.  In 
brief,  the  aim  has  been  to  show  that :  — 

(1)  Tiip  general  pric(>  level  (/')  is  determined  by  the 
'-uier  factors  in  the  equation  of  exchange  (money,  de- 
posits, their  velocities,  and  trade,  or  M.  M',  V,  ]'' 
and  T). 

(2)  So  fiir  as  we  have  evidence,  the  facts  of  history 
agree  with  this  conclusion.  In  particidar,  prices  have 
risen  after  new  gold  discoveries  or  hanking  expansion; 
have  fallen  af t«  ,  monetary  or  credit  contraction  ;  have 
moverl  alike  among  countries  having  the  same  mone- 
tary standard  ;  have  moved  differ»>ntly  among  coun- 
tries having  different  monetary  standf  rds  (golii,  silver, 

2U2 


§  -M 


PRESENT  PRICE  MOVEMENT 


paper)  ;  niul,  whore  we  liii\  e  .statistics  for  all  the  causos 
uffectinj;  price  levels  (viz.  M,  M'  V,  V,  and  7'),  have 
changed  froni  year  to  year  l)>-  ahnost  exactly  tiie  right 
amounts  to  fulfil  the  tluory. 

(3)  The  rival  theoiies  to  ( xplain  the  high  cost  of 
living  are  none  of  tliein  in  agreement  with  the  facts. 

It  is  altogether  natural  and  inevitable  that  the 
true  reason  for  the  high  cost  of  living  should  not 
be  generally  understood,  for  the  simple  reason  that 
few  people  ha\c  studied  monetary  science  and  his- 
tory enough  to  master  them.  The  same  misunder- 
standings have  inxariably  appeared  at  all  periods 
in  the  past  when  price  revolutions  were  in  progress. 
Phffbe  Sheavyn,  in  her  book  from  which  I  have 
quoted  earlier  in  this  volume,  in  referring  to  the 
Elizabethan  Age,  wheti  prices  were  rising  in  much 
the  same  way  as  to-day,  and  for  much  the  same 
reasons,  says  :  — 

"This  'dearth'  (ie.,  dearness)  of  the  necessaries 
of  life  is  a  frequent  topic  with  Elizabethan  writers  on 
social  questi  ris.  They  are  puzzled  to  account  for  it 
in  the  face  oi  the  evident  prosperity  of  the  nation." 

A  study  of  the  literature  of  two  generations  ago, 
when  the  mining  of  gold  in  California  and  Aus- 
tralia was  inflating  the  world's  currencies,  reveals 
popular  confusions  precisely  similar  to  those  now 
prevalent.  And  many  of  us  will  remember  the 
numerous  fanciful  causes  to  which  a  generation  ago 
the  prolonged  fall  of  prices  then  in  progress  was  mis- 
takenly ascribed. 

203 


J),- 


f 


/    f 


t 

H 

f 

!  I 


WHY    IS   TMK    DOLLAR    SHHINKINCi :'     [Cii.  XI. 

§  3.   Effect  of  Fallacious  Beliefs 

But  although  the  world  is  entirely  misled  and  con- 
fused as  to  the  causes  of  the  hij,'h  cost  of  living,  the 
very  fact  that  they  are  misled  and  confused  is  itself 
a  fact  of  portentous  significance  and  is  leading  to 
important  events,  political,  social,  economic.     Just 
as  the  misunderstandings  as  t(»  falling  prices  in  trie 
'80's  and   '9()'s  led  to  the  free  silver  campaign  of 
18t)G  and  stinndated  the  Irish  Land  Agitation  and 
Home  Rule  movement,  so  the  misunderstandings  as 
to  the  riseof  prices  now  going  on  are  leading  to  various 
proposals  in  various  places.     They  have  stimidated 
the  demand   for   lower   tariffs,    which    has  already 
become  effective  in  America,  and  which  is  being  in- 
sistently pressed  in  other  countries,  notably  (Jermany, 
France,  and  Japan.     On  the  other  hand,  in  England 
the  high  cost  of  living  has  been  cited  as  a  reason  why 
England  should  encourage  its  own  productions  by 
putting  on  a  tariff.      Everywhere  the  effect  of  the 
unrest  is  to  propose  a  change  from  the  present  con- 
dition of  things  to  something  alleged  to  be  better. 

Pnjbably  there  is  no  bigger  force  in  the  world  to- 
day working  for  socialism  than  the  rising  cost  of  liv- 
ing. The  workingmen  are  told  that  this  rise  is  due  to 
"capitalism"  and  are  urged  to  fight  capitalism.  A 
socialist  recently  said  to  me :  "  I  realize  i)erfectly 
that  the  high  cost  of  living  is  primarily  due  to 
the  increase  in  gold  i)ro(luction  and  the  inflation  of 
the  world's  currencies,  but  it  is  an  ill  wind  that  does 

204 


.1  .i_i 
*\    i     } 


5  3]  PRESENT   PIIK^E   MOVEMENT 

not  blow  some  ono  sonif  pood  arul  I  am  not  aitogpthcr 
sorry  to  see  the  high  eost  ;)f  living  used  in  (Jermany 
and  elsewhere  as  a  lever  to  arous(«  the  workingman 
to  beeome  a  revolutionary  socialist." 

The  dissatisfaction  and  unrest  among  wago- 
carners  is  certainly  profound  and  widespread.  As 
already  noted,  it  has  led  to  bread  and  meat  riots  in 
(Jermany,  Austria.  France,  anrl  Japan.  Byron  W. 
Holt  predicted,  in  a  remarkable  article  written  seven 
years  ago.  "a  prolonged  period  of  rapidly  rising 
prices,  is  reasoiuibly  certain  to  become  a  period  of 
unrest,  discontent,  agitation,  strikes,  riots,  and  wars." 

But  discontent  is  not  confined  to  the  labouring 
man.  Salaried  men  of  all  kinds, -—i.<?.,  clerks, 
tca-hers,  officials,  etc.,  — chafe  under  the  same  in- 
justices. The  beneficiaries  of  trust  funds  invested 
in  bonds,  such  as  widows  and  orphans,  and  endowed 
institutions,  .such  as  colleges  and  hospitals,  suffer 
because  their  interest  remains  the  same  while  prices 
rise.  Bonds  and  mortgages  have  grown  unpopular 
and  have  fallen  greatly  in  price.  One  great  life  in- 
surance company  has  lost  some  fifty  millions  of  dol- 
lars through  such  depreciation.  Even  the  railroads 
are  finding  difficulty  doing  business  under  their  pres- 
ent rates  because  their  prices  are  fixed  by  law,  while 
their  costs  go  up  with  the  rise  in  the  general  price 
level.  Tliis  is  the  finulamental  reason  why  rail- 
roads are  asking  permission  to  raise  their  rates. 

For  these  reasons,  because  of  the  actual  injustices 
produced  by  rising  prices  through  interference  with 

205 


ft' 


I 
I 


j! 


M 


/I 

'4 

.   i 


WHY    IS   THK    DOLLAR   SFIF{INKINn  ?     [Ch.  XI. 

distribution  and  tlic  .suljtlc  transfer  of  wealth  from 
tliose  having  fixed  money  ineomes  to  other  mem- 
bers of  soeiety,  it  becomes  of  the  utmost  importance 
to  know  whether  risinjj  prices  may  be  expected  to 
contin- e  in  the  future.  This  problem  will  '  ■ 
studied  in  the  next  chapter. 


206 


CIIAlTKll   XII 


TriK   FUTURK 

§  1.  As  to  Money 

WrKTriER  prices  will  coiitinin'  to  rise  is  a  question 
difficult  to  answer  fully  and  with  statistical  precision, 
owing  to  lack  of  data  sufficiently  complete.  And 
yet  tfiere  are  a  thousand  statistical  straws  in  l^^urope 
and  America  whicfi  sliow  clearly  which  way  the  wind 
is  hlowinj?. 

This  evidence  tal<cs  account  of  all  the  chief  factors 
which  can  influence  the  (leiteml  price  level.  Predic- 
tions based  on  one  factor  only  are  most  worthless. 
Thus,  altliough  jjold  is  an  important  factor  in  the 
case,  those  predictions  which  are  based  only  on  fore- 
casts of  future  gold  nroduction  are  of  little  value. 
In  order  to  forecast  the  future  we  need  to  examine 
tfie  prospects  for  each  of  the  five  factijrs  in  the 
equation  of  exchange  which  afl'ect  the  price  level 
(P).  These  are  money  (M),  its  velocity  (V), 
deposits  subject  to  check  (M'),  their  velocity  (I"), 
and  the  volume  of  trade  (T). 

Our  study  leads  to  the  general  conclusion  that  in- 
flation is  destined  to  continue  in  the  future,  that  is, 
that  the  facilities  for  exchanging  goods  are  likely  to 
increase  much  faster  than  the  requirements  of  busi- 

207 


m 


f'V.  ( 


WHY    IS   TIIK    DOLLAK    SHUINKINiJ  ,'     ((„.  Xll. 

tH'ss.  Taking  the  world  as  a  whole,  inoiicy  and 
credit  substitutes  for  iuoiie\ .  that  i>,  cheeks,  will, 
aeeordinji  to  these  ealeulations,  outstrip  the  growth 
of  l)Usiness  In  prohahly  as  tuueh  as  J  per  cent  per 
aiuuini,  eausiiij,'.  therefore,  an  aiunial  rise  in  prices 
of  alxiut  2  per  cent  per  annum,  possihiy  |,.ss,  Init 
prohably  more.  For  the  I'nited  States  in  particu- 
lar the  rise  in  the  price  level  for  the  next  few  years 
is  likely  to  he  arrested  l>y  the  tarilf  reductions  of 
l!>lo.  caMMUj;  an  exj ')rt  of  ^old  and  a  contraction 
of  our  cur-ency,  althoUf,'li  the  new  currency  act  will 
tend  to  expand  the  deposit  currency  of  the  coujitry 
and  so  i)rolon^'  the  period  of  adjustment  by  means  of 
the  v\]xnt  of  f,'oId.  After  a  new  ecpiilibrium  is  es- 
tablished, the  upward  movement  is  likely  to  Ik-  re- 
newed again. 

We  can  best  justify  these  conclusions  by  a  brief 
review  of  the  evidence. 

First,  then,  let  us  consider  the  future  world  supply 
of  money.  This  will  be  aflVcted  by  gold  nnning  and 
by  changes  in  monetary  systems.  There  is  some 
rea.son  to  belii-ve  that  gold  production  has  reached 
its  maxinnuu  and  may.  in  the  future,  gradually 
decline,  but  it  would  be  a  gn^at  mistake  to 
jump  to  the  conclusion  that  prices  must  there- 
fore fall.  At  the  present  writing  the  reports 
for  the  world's  gold  production  in  I ',»!;{  are  ex- 
citing comment,  and  many  arc  rejoicing  or  com- 
plaining because  an  actual  reduction  has  apj)arently 
occurred.      But  such  a  view  overlooks  the  fact  that  it 


:'\j'6 


1 1 J 


TIIK   FCTIJUK 


II- 
iiii 


's  nut  tlu.  annual  nntpi.t,.rp.|,l.  or. V.I,  tl...unn..Hl 

vvl.Hl.  rrallyallVrf.  ,,ri,,-s.  l,Mt  th,.  total  ,vW,M,r  Kol.l 
;!'"""••-.    ^'''— ''i-«<.<knr,oM,..oia.v,navn.ii. 
i.m.-t....H.n.as,.|on.art,.rKo|.|pnH|„,tio,;i,a>i..., 

••fall  of},  j„:4  a.  a  lak..  may  .■ontiinu.  to  ris,.  |..„K' atW 
tl-  n...n.t;nn  torn-nt  ul.i,.|,  i.  fi,,;,.^  ;,  ,„,  ,„,^,„,  ,,, 

--ly.  l'-Iak..<.ontinu..s  to  fill  ,,,,.,  Ion.  as  tlu. 
"""'•^VMi^'  .tn.ani,  .nl,.i.iinK  though  it  ,nav  1,.  .till 
^•'•"t-nu.  to  ,,onr  in  f..t.T  than  evaporation  an.i 
••l...r<lra,ns.lrawtlu.  water  ont.  The  ^reat  lakes  of 
t''''VvorMs,,ol,le,.inwil|filh,p  ,,,,.,,,.,,,,, ,.,,,.,, 
--n   uhil..  |„,,„   exhauste.|,  nevertheh.ss    ..ontinn,. 

to  I-ur.n  ,oM  fa.ter  than  the  eonsmnption  aiMl  loss 
«>f  K<>l«i  <lrain  it  out. 

'H";  '""St  earelMl  review  of  present  «oM-,nininK 
-•'•I't.on.  shows  that  we  may  .-xpeet  a  eontinnancv 
-  ^oM  inflation  for  a  generation  or  ,„ore.  In  1*^)8 
«^-  l^auuay,  in    Thr   Wurl.r.s  Cnid,    wn.te:   "for"  at 

<;ast  thirty  years  we  may  eonnt  on  an  ontput  of  K<.l.i 

K'lHT    than,  or    at   Last    eomparahh-    to.  that  of 

h,-  last  few  years.-     This  ...hl  will  ..me  from  the 

V;""'  "''^"^;  ;''^'^^"-  ^'---  tl-  Transvaal,  ami 
other  parts  of  Afri,.a  an.l  Australia,  an.l  later  fnun 

(olomh.a.  lUn, a.  (1„-h.  the  rral  l>n.vinee.  Siberia 
a'"I  Kon.a.  Protestor  K,l,..worth  Davi.l.  of  Sv.h.ev 
I  ">y''rs.ty.  the  Australian  .eolo.ist  who  .u-eom- 
P-.'-"<l  Muukhton  on  hi.  Antan-tie  ..xpe.lition.  an- 

tH-.pates  that  .oM  reefs  willhe  fouiul  in  this  region 
as  rich  aiul  workable  a>  those  of  Alaska, 

P  209 


■Mm 


I  m 


n 


M 

; 

!^' 
i 

;i 

pi 
1,1 


WHY    IS   THE    DOLLAR   SHRINKING?     [Ch.  XII. 

All  this  takes  no  account  of  possible  improvements 
in  metallurgy.     But  if  we  let  imagination  run  a  little 
ahead  of  our  times,  we  may  expect  such  improve- 
ments in  the  future,  just  as  in  the  past.     Still  lower 
grades  may  be  worked  or  possibly  the  sea  compelled 
to  give  up  its  gold.     Like  the  surface  of  the  conti- 
nents, the  waters  of  the  sea  contain  manif  thomand 
time:;  as  much  gold  as  all  the  gold  thus  far  extracted 
in  the  whole  history  of  the  world.     It  is  hoped  that 
the  knowledge  of  how  to  get  this  hidden  treasure 
may  not  be  secured.     To  whatever  extent  inventors 
and  gold  miners  might  be  enriched  thereby,  scarcely 
a  worse  economic  calamity  can  be  iinagined  than  the 
resulting  depreciation.     It  may  be,  however,  that 
only  by  such  a  calamity  can  the  nations  of  the  world 
be  aroused  to  the  necessity  of  getting  rid  of  so  elusive 
a  standard  of  value  as  the  present  gold  standard. 

Besides  the  actual  increase  of  gold  there  is  a  virtual 
increase  through  the  release  of  Oriental  hoards.  We 
may,  I  behove,  expect  such  a  release  of  Oriental 
hoards  in  the  future.  The  astonishing  lengths  to 
which  hoarding  is  now  carried  in  Egypt  and  India 
are  emphasized  by  Director  Roberts  of  the  United 
States  Mint.     He  says  :  — 

"The  Egyptian  situation  is  somewhat  like  that  of 
India  —  but  there  is  some  mystery  about  the  way 
the  gold  disappears  from  view.  It  does  not  enter 
into  bank  stocks,  and  it  is  difficult  to  understand  how 
a  country  of  its  size  and  population  and  in  which 
the  masses  of  the  people  are  so  poor  can  absorb  so 

210 


S  1] 


THE   FUTURE 


much  gold.  .  .  .  Some  iiglit  is  slied  upon  the 
situation  l)y  the  t'ollorting  statement  in  an  ad(lre.;s 
by  Loni  (Toiner,  made  in  London  in  1907:  — 

'"A  Httle  while  ago  I  heard  of  an  Egyptian  gentle- 
man who  died  leaving  a  fortune  of  £S0,()()0,  the  whole 
of  which  was  in  gold  coin  in  his  cella  -s.  Then  again, 
I  heard  of  a  substantial  yeoman  who  bought  a  prop- 
erty for  £2r),()0().  Half  an  hour  after  the  contract 
was  signed  he  appeared  with  a  train  of  (ionkeys 
bearing  on  their  backs  the  money,  which  had  been 
buried  in  his  garden.  I  hear  that  on  the  occasion 
of  a  fire  in  a  provincial  town  no  less  than  £5,()0()  was 
found  in  earthen  pots.  I  ((add  multiply  instances  of 
this  sort.  There  can  be  no  doubt  that  the  practice 
of  hoarding  is  carried  on  to  an  excessive  degree.'  — 
(The  Staii'if):' 

In  the  minutes  to  the  Report  of  the  Indian  Cur- 
rency Committee  which  api)eared  in  1892,  or  over 
twenty  years  ago,  the  presiding  Chairman,  Lord 
Farrer  Ilerschell,  gave  the  following  evidence:  — 

"It  is  remarkable  how  soon  coined  money  dis- 
appears in  India.  I  was  there  at  the  time  of  the 
American  war,  when  large  sums  of  money  came  into 
the  country  and  momentarily  tiiere  was  an  immense 
advance  in  the  price  of  everything  in  Bombay ;  but 
in  a  short  time  the  great  flood  of  silver  ihat  came  in 
disappeared  among  the  great  population  of  India 
as  water  would  in  satid." 

The  amount  of  such  hoards  has  been  emphasized 
by  Director   Roberts,   in  the    passages   quoted  as 


\'i 


WHY    IS  THE    DOLLAIl   SHRINKINH?     [Ch.  XII. 


|i!f; 


Ml 


s. 

1  >, 

'1 

»  I 

'? 

v| 

^iil 

' 

il 

\-  t 

- 

H 

il! 


'f.i 


evidence  that  they  provide  a  future  sink  for  gold 
and  thus  tend  to  absorb  gold,  and  perhaps  arrest 
the  rise  of  priees.  There  can  be  no  doubt  that  the 
Oriental  hoarding  will  continue  for  years  to  afford 
an  outlet  for  redundant  gold  and  so  tend  to  mitigate 
the  resultant  rise  of  prices.  But  it  is  erroneous  to 
conclude  that  it  will  be  sufficient  to  arrest  this  rise. 
The  weakness  of  such  an  argument  lies  in  the  tacit 
assumption  that  the  influence  of  hoarding  will  be 
more  powerful  in  the  future  than  in  the  past,  whereas 
the  opposite  is  more  likely  to  be  the  case  ;  and  even 
in  the  past  it  has  not  been  sufficient  to  prevent  a 
rapid  rise  of  prices. 

In  the  future  we  must  reckon  with  a  lessening 
tendency  to  hoard.  Just  as  with  the  introduction 
of  banking,  hoarding  long  ago  went  out  of  vogue  in 
England,  and  more  recently  in  I'rance,  so  it  must 
surely,  if  slowly,  go  out  of  vogue  in  India  and  Egypt. 
The  transformation  will  take  place  as  these  countries 
gradually  introduce  Occidental  banking.  Already 
there  is  a  rapid  growth  of  banking  in  these  countries. 
The  same  principle  applies  to  Oriental  hoards  in 
the  form  of  ornaments.  Centuries  ago  Englishmen 
used  to  put  part  of  their  hoards  into  "plate,"  which 
could  be  reconverted  into  coin  if  emergency  required. 
With  the  advent  of  banking  devices  such  a  custom 
has  long  since  disappeared.  It  is  to  be  expected  that 
little  l)y  little  the  same  process  will  turn  part  of 
the  Oriental  hoards  of  onuiments  into  monetary  use. 
Thus,    as   a    conseciuciue    of   the    introduction    of 

212 


■  1  '.; 


8  i.I 


THE   FUTURE 


Western  civilization  into  the  Orient,  we  have  the 
prospect  of  further  additions  to  the  effective  use 
of  the  world's  gold,  u  further  virtual  inflation  of  the 
currency.  In  other  words,  Oriental  hoarding  merely 
gives  temporary  relief.  Part  of  the  gold  dug  out  of 
the  ground  in  Africa  is  put  back  into  the  ground  in 
Asia.  But  some  day  it  is  sure  to  be  dug  up  again 
and  put  into  circulation. 

Director  Roberts  says  :  — 

"  There  is  an  undoubted  tendency  in  all  countries 
to  use  banks  more  than  formerly,  and  it  is  probable 
that  the  stock  of  gold  in  banks  has  been  recruited 
not  only  from  new  p-oduction,  but  to  some  extent 
from  gold  heretofore  held  in  private  hoards  and  out 
of  use.  In  every  country  the  younger  generation 
to  whom  these  hoards  descend  is  likely  to  put  them 
to  some  use." 

Not  only  individual  hoards  but  also  gov- 
ernment hoards  and  even  bank  hoards  seem  likely 
in  the  future  to  decline  or  at  any  rate  to  cease 
being  accumulated.  A  decade  and  more  ago  gold 
was  so  scarce  as  compared  with  the  demands  made 
upon  it  that  a  large  part  of  the  early  additions 
to  the  world's  stock  were  absorbed  to  strengthen 
weak  reserves  and  government  hoards  and  to  replace 
silver  and  paper.  About  a  billion  of  gold  has  been 
accumulated  by  the  Tnited  State.,  in  the  last  ten 
years  and  about  half  a  billion  by  Russia  and  France. 
Moreover,  Japan,  .\rgentina.  and  Brazil  have  ab- 
sorbed much  gold.     India,  Mexico,  the  Philippines, 

213 


!  I; 


m 


w^ 


J  s 


.4 
( 

Hi 


11 


WHY   IS  THE    DOLLAR   SHRINKING?    [Ch.  XII. 

Panama,  and  the  Straits  Settlements  have  made 
demands  on  gold  to  sustain  their  "gold  exehange 
standard."     An  economist  of  note  writes  :  — 

"  The  effect  in  raising  prices,  I  think,  would  have 
been  \astl>-  greater  than  it  has  been  had  not  the 
United  States,  llussia,  and  Eg>pt  been  hoarding 
gold  and  thus  employing  it  uneconomic-ally." 

These  demands  on  gold  have  now  been  so  tar 
satisfied  that  in  the  Future  any  addition  to  the  world's 
stock  will  be  freer  to  enter  actual  circulation  and 
so  to  act  on  prices. 

As  has  been  previously  explained,  hoarded  money 
is  simply  money  which  circulates  slowly  or  not  at 
all.  Consequently  the  discontinuance  of  hoarding 
will  mean  an  increase  in  the  velocity  of  circulation 
of  money,  and  this  will  tend  to  raise  prices.  It 
will  furthermore  mean  the  placing  of  money  in 
banks,  and  this  money  will  be  the  reserve  on  the 
basis  of  which  five  or  ten  times  as  much  "  deposits 
subject  tf>  check"  will  develop.  These  deposits 
will  not  only  be  five  to  ten  times  as  large  an  amount 
as  the  money  they  displace  from  circulation,  but, 
judging  b\-  Occidental  experience,  they  will  also  cir- 
culate two  or  three  times  as  fast.  Consequently 
their  power  to  aft'ect  prices  will  be  ten  to  thirty 
times  as  much  as  the  money  displaced. 

The  discontinuance  of  hoarding,  therefore,  will, 
in  various  ways,  tend  to  raise  prices.  To  be  conser- 
vative. I  have  assumed  in  my  calculations  that  the 
effect  on  the  velocity  of  circulation  of  money  will  not 

214 


•li'l 


ti 


5  -M 


THE  FUTURE 


be  sufficient  to  raise  its  rate  of  increase  above  ^  per 
cent  per  year.  But  it  would  not  be  surprising  if 
the  truth  should  he  several  times  this  figure,  par- 
ticularly as  the  extension  of  rapid  transportation  will 
also  tend  powerfully  in  this  direction,  especidly  in 
slow  and  baclcAvard  countries  like  India. 

We  see,  then,  that  in  the  future  monetary  infla- 
tion is  likely  to  be  at  work,  both  through  an  actual 
increase  in  the  quantity  of  money  and  also  through 
its  virtual  increase,  which  will  be  brought  about  by 
the  release  of  the  great  hoards  of  money  in  the  P'ast. 
Since  the  discontinuance  of  hoarding  means  the 
same  thing  as  an  increase  in  the  velocity  of  circula- 
tion of  money,  our  conclusion  may  be  stated  as 
follows.  Monetary  inflation  may  be  expected,  both 
from  an  increase  in  money  and  from  an  increase  in 
its  velocity  of  circulation ;  that  is,  to  go  back  to  the 
equation  of  exchange,  an  increase  in  both  M  and  V. 

§  2.  As  to  Credit  and  Volume  of  Trade 

We  have  just  mentioned  the  effect  which  the  dis- 
continuance of  hoarding  money  will  have  on  the 
volume  of  deposits  subject  to  check.  Let  us  now 
consider  in  a  more  general  way  the  importance  of 
the  growth  of  these  deposits  all  over  the  world. 
When  once  it  is  generally  recognized  that  de- 
posits subject  to  check  are  a  form  of  currency 
similar  in  function  to  bank  notes,  —  in  fact,  are 
today  the  cliirf  form  —  the  discussion  of  the  price 
level  will  assume  a  ■        phase. 

215 


WHY    IS   THE    DOLLAR   SHRINKING?     [Ch.  XII. 


iji 


I! 


I 


^li 


'M 


In  the  United  States  tlie  volume  of  eheek  trans- 
actions forms  92  per  cent  of  all  triinstictions.     Prob- 
ably something  like  this  ratio  obtains  in  Canada  and 
England.     Outside  of  English-speaking  lands,  how- 
ever, the  ratio  is  inidoubtedly   mueh  less.     If  we 
could  assuuK'  that  the  volume  of  check  transactions 
maintains  a  constant  ratio  to  that  of  money  transac- 
tions, the  circulation  of  checks  would  not  then  have 
to   be   reckoned   with   as   an    independent    factor. 
Some  day  in  the  future,  wlien  the  use  of  checks  has 
grown  up  to  its  full  capacity-,  it  would  not  be  strange 
if  the  ratio  of  check  expenditure  to  money  expenditure 
should  thereafter  remain  fairly  constant.     At  present, 
howe\-er,  the  use  of  checks  in  i)lace  of  money  is  being 
extended  with  prodigious  rapidity,  and  far  faster  than 
the  use  of  money.     7  his  Is  the  <Um iita id  feature  of  the 
present  dtuation  and  forms  the  chief  basis  of  the  fore- 
cast here  attempted.     All  nations  are  making  a  con- 
timndly  larger  use  of  checks  relatively  to  money. 
The  present  rate  of  increase  'u\  I'Vance  is  7  per  cent, 
in  Germany  V.i  pvr  cent,  Holland  !)  per  cent,  Den- 
mark 10  per  cent.  Norway  S  jht  cent,  Sweden  oj, 
})er  cent,  Switzerland  .">  ])er  cent,  Russia  2\  per  cent, 
Japan  10  per  cent,  tlie  Austro-IIungarian  Bank  17 
per  cent.     In  backward  India,  where  dei)osit  bank- 
ing has  only  just  begun,  the  rate  of  increase  is  9  per 
cent,   in    Mexico   11    per  cent.      Even   in    Englisli- 
siH-aking  lands,  where  checks  have  been  used  for  so 
long  a  time,  and  where,  therefore,  if  anywhere,  we 
should    expect   to  find   thai    their    u.>c   had    nearly 

216 


§  2.1 


THE  FUTURE 


reached  its  limit,  the  volume  of  deposits  is  still  in- 
creasing; in  England  at  the  rate  of  '^  per  cent  per 
annum;  in  the  United  States,  at  7.3  per  cent;  in 
Canada,  at  12  per  cent ;  and  in  Australia,  at  ^  per 
cent.  (The  data  for  Australia  are  too  meagre  to  be 
considered  representative.) 

Outside  of  English-speaking  countries  the  use  of 
checks  is  still  in  its  infancy.  Continental  Europe 
and  Japan  during  the  next  few  decades,  will  rep- 
resent a  vast  region  for  the  extension  of  deposit 
banking.  It  would  not  be  surprising  if,  in  Ger- 
many and  other  Continental  countries,  the  use 
of  checks  should  soon  reach  the  stage  when  every 
business  man  would  begin  to  realize  that  he  must 
employ  them.  When  this  feeling  appears  the  use 
of  checks  will  increase  at  an  even  more  rapid  rate 
than  at  present.  The  deposit  currency  of  the  United 
States  now  far  exceeds  that  of  other  countries,  but 
the  deposit  currency  of  Continental  Europe  and 
Japan  will  become  more  and  more  prominent,  and 
by  the  time  —  perhaps  a  generation  hence  —  when 
their  rate  of  increase  begins  to  slacken,  India  and 
other  of  the  (now)  backward  countries  will  need  to 
be  reckoned  with. 

Finally,  we  have  the  testimony  of  the  statistics  of 
clearing-houses,  'xhe  rate  at  which  these  increase  is 
used  as  a  rough  indication  of  the  rate  at  which  the  use 
of  checks  increases.  Clearings  in  general  show  a 
more  rapid  rate  of  increase  than  deposits.  This  in- 
dicates that  the  use  of  chocks  is  increasing  faster 

217 


WHY    IS  THK   DOLLAR   SHRINKING?     [Ch.  XII. 


ri' 


I 


I 


iVl 


than  the  deposits  apainst  wliich  they  are  drawn, 
which  means  that  the  activity  or  velocity  {V)  of 
these  deposits  is  increasing. 

In  the  United  States  the  velocity  or  "activity" 
of  deposits  has  shown  a  progressive  tendency  to 
increase.  Concentration  of  popuhition  in  cities 
and  rapid  transportation,  etc.,  tend  to  increase  tiiis 
vehxity.  The  activity  of  deposits  varies  almost 
exactly  with  the  size  of  the  cities,  and  the  range  of 
variation  is  surprisingly  great.  Thus  the  activity 
exceeds  100  times  a  year  in  Paris,  Berlin,  and  Brus- 
sels, but  is  only  1()  times  a  year  in  Xew  Haven, 
Connecticut,  four  times  a  year  in  Athens,  Greece, 
and  only  once  a  year  in  Santa  Barbara,  California. 

These  results  accord  with  the  fact  that  the  velocity 
of  circulation  of  deposits  in  the  United  States  has 
increased  very  substantially,  while  the  concentration 
of  population  has  been  going  on.  During  the  last 
eighteen  years  it  has  risen  from  37  times  a  year  to 
54  times  a  year,  that  is,  about  2  per  cent  i)er  annum. 
In  the  world  as  a  whole  the  rise  is  probably  as  great. 

Finally,  we  come  to  the  volume  of  trade.  This 
is  the  one  factor  which  acts  to  restrain  the  rise  of 
prices.  The  volume  of  trade  will  continue  to  in- 
crease in  the  future  as  in  the  past ;  but  as  far  as  I 
know,  there  is  no  evidence  t\\i\t  it  will  expand  any 
faster  in  the  future  than  it  has  in  the  years  which 
have  just  passed  by ;  and  no  evidence  that  it  will, 
as  long  as  the  present  develo])ment  of  banking  con- 
tinues, outstrip  the  expaii>iou  of  media  of  exchange. 

218 


if 


S  3] 


THE   FUTURE 


On  the  contrary,  there  is  some  reason  to  believe 
that  trade,  while  it  will  continue  to  expand,  will 
expand  more  slowly  in  the  future  than  in  the 
past.  The  fuller  occupation  of  the  land  of  the 
world  and  the  decrease  in  the  rate  of  growth  of 
our  population,  which  is  partly  a  consequence  of 
this  occupation  and  partly  a  consequence  of  the 
voluntary  decrease  in  the  birth-rate,  should  tend  to 
curb  the  rate  of  increase,  although  the  rate  of  in- 
crease will  doubtless  continue  great. 

§  3.  Conclusions 

For  the  gold-standard  world  as  a  whole  (compris- 
ing now  all  the  important  commercial  nations  except 
China),  my  estimates,  as  finally  adjusted,  indicate 
that : — 

The  quantity  of  money  in  circulation  is  increasing 
at  the  rate  of  2.V  per  cent  annually, 
Its  velocity  of  circulation,  K  per  cent, 
Deposits,  GJ  per  cent, 
Tlieir  velocity,  1 J  per  cent. 

These  four  make  an  increase  in  the  total  circulation 
of  media  of  exchange  of  7  per  cent  per  annum.  This 
is  outstripping  trade,  which  is  growing  only  4|  per 
cent  per  annum.  In  short,  then,  world  prices  have 
been  going  up  23-  per  cent  a  year  because  facilities 
for  payment  are  outstripping  the  growth  of  trade  by 
that  amount. 

There  is  every  reason  to  believe  that  these  rates 
fur  the  increase  of  money,  deposits,  and  their  vc- 

219 


It  J 


ifr 


WHY    IS   THE   DOLUVR   SHRINKING?     [Ch.  XII. 

locitics  will  bo  no  less  in  the  future  than  in  the  past, 
and  that  the  growth  of  trade  will  he  not  mueh,  if 
any,  greater;  but,  to  he  conservative,  I  hav»>  re- 
duced the  estimates  for  the  growth  of  money  and 
deposits. 

The  following  estimates  for  the  future  rates  of 
increase  of  the  primary  world  factors  in  the  problem 
seem,  therefore,  conservative  :  — 

Money,  not  less  than  2  per  cent  per  annum. 
Its  velocity,  not  less  than  .1  per  cent  per  annum. 
Deposits,  not  less  than  (i  per  cent  per  annum. 
Their  velocity,  not  less  than  l\  per  c-ent  per  annum. 
Trade,  not  more  than  4^  per  cent  per  annum. 

Further  calculation  results  in  the  estimate  that  the 
total  use  of  money  {i.e.,  the  product  of  money  mul- 
tiplied by  its  velocity,  or  MV)  will  grow  at  least  as 
fast  as  2l  per  cent  per  annum ;  and  that  of  checks 
(M'V)  as  fast  as  7|  per  cent.  Checks  being  much 
more  important  than  money,  it  can  be  shown  that 
the  average  growth  of  the  combined  facilities  for 
buying  goods  (by  both  money  and  checks)  will  prob- 
ably be  at  least  ^  per  cent  per  annum.  As  trade 
promises  to  grow  at  most  only  4i  per  cent  per  annum, 
I  regard  the  difference  (G^  -  ll),  or  2  per  cent,  as 
a  fairly  safe  minimum  estimate  for  the  future  aver- 
age annual  expansion  of  the  scale  of  prices,  while, 
humanly  speaking,  I  feel  perfectly  safe  in  predicting 
that  the  general  trend  of  world  prices  for  many  years 
to  come  icill  not  be  dounuard. 

220 


^f^ 


I  3.1 


THE  FUTURE 


Of  course  no  pricr  curve  shows  a  continuous 
movement ;  it  undulates  constantly,  and  we  are 
just  now  recovering  from  somethinR  like  a  crisis. 
Accordingly,  there  is  a  temporary  suhsidence  in  the 
rise  of  prices.  After  this  is  over  prices  will  in  all 
probability  resume  their  upward  course  althouj;h 
they  will  doubtless  contituie  to  undulate  somewhat 
from  year  to  year.  But  the  general  trend  during 
the  next  two  decades,  let  us  say,  will  probably  be 
upward  for  the  world  as  a  whole. 

The  lowering  of  the  tariff  in  the  United  States 
will  tend  to  produce  an  export  of  gold  for  a  few  years 
to  pay  for  increased  imports  and  so  reduce  the 
volume  of  currency  anrl  thus  tend  to  reduce  prices. 

The  currency  act,  on  the  other  hand,  must  inevi- 
tably tend  to  expand  the  currency,  for  it  will  put  a 
stop  to  our  present  uneconomical  use  of  bank  re- 
serves and  substitute  a  system  which  will  virtually 
release  reserves  now  locked  up.  The  tendency  of 
this  change  (however  desirable  on  other  grounds) 
must  be  to  inflate  the  currency  still  further  and  to 
raise  prices.  But  as  it  will  accelerate  the  export  of 
gold,  the  ultimate  result  will  simply  be  to  spread 
the  effect  over  other  countries.  For  the  Uruted 
States  itself  the  price  level  will  tend  to  approximate 
that  of  the  outside  world.  Tliis  approach  toward 
the  world's  price  level  through  the  export  of  our  gold 
may  occur  either  through  a  fall  of  our  prices  or,  what 
is  more  likely,  a  rise  in  prices  elsewhere.  In  short 
the  net  elTect  will  probal>l\  be  a  distinct  arrest  for 

221 


hi 


WHY    IS  THK   DOLLAR   SIIRINKIN'O?     tr,,.  XII. 

p«.rhiips  Ji  .l.-rade  in  the  rise  of  i)ric.'s  in  tho  VmUd 
Statos.  while  prices  ahroml  are  rising  t..  cateh  up 

with  ours. 

Th-s,«   forecasts  (that  world   prices  w.il    rise  in 
the  next  decade  or  two  with  sonic  temporary  in- 
terruptions, including  that  now  due  in  the  I'nited 
States  while  we  are  adjustin^^  internal  trade  to  u 
lower  taritV)  may.  of  course,  not  he  realized.     Prices 
mav  fall  or  stand  still,  hut  the\   are  not  likely  to 
staiid  still.     ludpn^  from  the  past,  the  course  of 
prices,  like  the  course  of  true  love,  "never  did  nm 
smooth,"  and  it  would  he  surprising  if  it  should  run 
smooth  in  the  future.     In  the  early  '90's  the  world 
was  seeking  relief  from  an  intolerable  fall  in  prices 
and  at  first  the  prospect  of  rising  prices  was  hailed 
with  dcHght.     Hut  two  wrongs  d    not  make  a  right. 
If  in  the  next  ten  years  prices  should  fall  rapidly, 
the  world  will  not  he  thankful,  but  will  resume  the 
old  complaints  of  depression  of  trade,  the  burden 
of  debts,  and  all  the  evils  in  men's  minds  twenty 
years  ago.     What  is  needed  is  neither  a  rise  nor  a 
fall  in  prices,  but  a  stable  price  level.     This  means 
a  dollar  stable  in  purchasing  power. 

It  is  unfortunate  that  the  purchasing  power  of 
money  should  be  always  at  the  mercy  of  every 
chance  of  gold-mining.  There  are  few  enterprises 
more  subject  to  chance  than  gold-mining.  There 
are  always  chances  of  finding  new  gold  deposits, 
chances  of  their  "panning  out"  well  or  ill,  and 
chances  of  new  methods  of  lueLallurgy.     On  these 

222 


J  3.) 


THK  FlJTrri'} 


fitful  {'omlitiotis  the  purflmsiiijj  power  of  money  is 
now  (lepeiident.  ('oii,se([uently,  every  one  interested 
in  lon^-tiine  eoiitnuts,  whether  (h-htor  or  crecHtor, 
stockholder  or  hondholdcr,  waKe-eariier  or  sivvii  ^s- 
bank  depositor,  is  nuide  to  some  ext(>  it  u  partuKer 
in  these  chances.  In  a  sense  every  oTie  of  us  who 
uses  gold  as  a  stan(hird  for  (leferr(>d  payments  be- 
comes a  specuhitor  in  j;old.  We  all  take  our  chances 
as  to  what  the  future  dollar  will  buy.  The  problem 
of  making  the  purchasing  power  of  inone>'  stable  so 
that  a  dollar  may  be  a  dollar — the  same  in  value 
at  one  time  as  another  —  is  one  of  the  most  serious 
problems  in  applied  economics. 

In  another  book  I  hope  to  show  how  this  problem 
of  standardizing  the  dollar  can  best  be  solved. 


223 


1 


f 


■l     1 


INDEX 


Activity  of  deposits  subject  to 
check,  proRressive  tendency 
of,  to  increase,  210-218. 

Adulteration  of  food,  mistake 
of  assinning,  as  a  reason  for 
the  high  cost  of  living,  197. 

Agricultural  statistics,  conclu- 
sions to  l)e  drawn  fronj,  con- 
cerninK  faraiing  and  the  high 
cost  of  livin;?,  200-201. 

Algebraic  illustration  of  e(tua- 
tion  of  exchange,  44-40. 

Antarctic,  promise  of  new  gold 
supple-  from  the,  209. 

Aristopiiaues,  quoted  to  show 
recognition  of  principle  of 
Gresham's  Law  by  the 
ancient  Greeks,  121-122. 

Arithmetical  illustration  of 
equation  of  exchange,  34-41. 

Armaments,  discussed  as  a 
cause  of  the  high  cost  of  liv- 
ing, 197-198. 

Arts,  relation  between  consump- 
tion of  gold  in  the,  and  prices, 
lis. 

Australia,  diagram  <jf  price 
curves  in,  173. 

Austria-Hungary,  price  move- 
ments in,  171. 


Balance  of  trade,  "favour- 
able" and  "unf;i\i)iiral)le," 
20;  influence  of,  dii  the 
(|uantity  of  money  and  there- 
fore    on      prices,      104-119; 


certain     fallacies     connected 
with,  109-111. 

Hank  depo.sits,  one  of  the  two 
chief  classes  of  circulating 
media,  30  ;  are  not,  however, 
money,  30 ;  explanation  of, 
52  fif. ;  influences  affecting 
velocity  of  circulation  of 
money  and,  and  therefore 
affecting  prices,  93-101  ;  in- 
fluenc'cs  affecting  volume  of, 
and  therefore  affecting  prices, 
101-103;  relation  of  present 
upward  i)rice  movement  to 
increase  in,  Ih()-1H5;  effect 
on.  of  discontinuance  of 
hoarding,  210-215;  present 
and  future  volume  of,  216- 
2  IS. 

Banking,  explanation  of,  52- 
59  ;    limitations  of,  63-68. 

Bunking  systenis,  effect  of 
character  of,  on  volume  of 
trade  and  on  prices,  92 ; 
effect  of,  on  volume  of  de- 
posit currency  and  therefore 
on  prices,  101. 

Bank-note,  distinguished  from  a 
check  as  being  real  money,  30. 

Bank-notes,  as  examples  of 
fuluciary  moiiej'.  32  ;  princi- 
ples governing,  58-59;  safe- 
guarding of,  iiy  the  national 
government,  08. 

Baiikni|>tcies  during  crises,  trac- 
ing causes  of,  78  80. 

Barter,  the  exchange  of  goods 
against  goods,  4,  34 ;  be- 
comes ob.solcte  ;)n  account  of 
its  inconveniences  and  annoy- 


225 


INDEX 


W 


1 


^^'■Sl 


i. 


t 


i  i  1 


be 


never 

-2'^. 

of     price 


ancea,     28 ;      will 
entirely  extinct,  'M 
HelRiuni,      diagram 

rurves  in,  lOS. 
Benefits     of     w.-alth,     defined 
8-9  ;  measurement    of,    9-10; 
costs  are  the  opposite  of,  or 
negative  benefits,  10. 
Bills    of    exchanRC,    degree    of 

exehanReabili'y  of,  29. 
Bimetallism,    syaiem    of,    124- 

130. 
Book  credit,  effect  of,  on  ve- 
locity of  circulation  and  on 
prices,  95-97.  101-102. 
BuaincM  confidence,  effect  of, 
on  trade  and  therefore  on 
prices,  92. 

C 


California,  price  cycle  start- 
ing with  discovery  of  gold  in, 
82. 

Canada,  diagram  of  price  curves 

»«•  !♦'''*■  »    .    .  . 

Capital,  price  level  affected  by 

accumulation  of,  S9-90. 
Certificates  of   property   rights 
distinguished  from  the  rights 
themselves,  14. 
"Charging,"    effect  of,  on   ve- 
locity  of   circulation  and   on 
prices.    95-96;     increase    of 
deposit  currency  caused  by, 
and    consecjuent    raising    of 
prices,  101-102. 
Check,     deposits     subject     to. 

See  Bank  deposits. 
Checks,  exchangeability  of.  29 ; 
wherein  bank-notes  differ 
from,  30;  not  money  because 
not  genenilly  acceptable,  30  ; 
effect  of  use  of.  on  velocity  of 
circulation  and  on  prices.  97, 

101. 
Cheik  transactions,  i)re8ent  vol- 
ume of,  and  forecast  of  future, 
216-218, 


Circulating  credit,  explanation 
of,  52 -5S;  the  basis  of,  59- 
03;  relation  between  quan- 
tity of,  to  quantity  of 
money,  71-75. 

Circulating  media,  defined,  29; 
two  chief  classes  of,  money 
and  bank  deposits,  29-30; 
figure  indicating  classification 

of,  32. 
Circulation  of  money,  acquisi- 
tion of  wealth  not  promoted 

by.  18.  .      .^  , 

Clearing  houses,  significance  ol 

increase  in,  217-218. 

Coats,    R.    H.,    statistics    by. 

Coinage  ratio,  the  ratio  of  the 
weight  of  the  silver  dollar 
to  that  of  the  gold  dollar. 
125  n.  ^    .  ^. 

Coining,    merely    the    finishing 
touch  on  money  as  distinct 
from      other      exchangeable 
goods,  27. 
Colbertism.    set    of    doctrinea 

called,  19-20. 
Concentration  of  population  as 
a    reason    for    high    cost    of 
living,  200. 
Cost  of  living,  dependent  upon 
amount  of  money  income  it 
costs  to  secure  real  income. 
12.     Sre  High  cost  of  living. 
Cost  of  production,  fallacy  in 
assigning    as    a    reason    for 
high  cost  of  living,  195-197. 
Cosls    of    wealth,    defined    as 

negative  benefits,  10. 
Credit,  elasticity  of,  as  a  safe- 
guard agaiii.'it  crises,  87. 
Credit  cycle,  course  of  a,  76-83. 
Crir'is,    culmination   of  upward 
price  movement  in  a,  78-80 ; 
reaction   and   recovery   after 
a,  M)  n3  ;   means  of  avoiding. 
83->-7.  ^.       , 

Cromer,  Lord,  on  hoarding  by 
Orientals,  211. 


22G 


mmm 


INDEX 


Currency  act,  provisions  of  tho 
new,  tending  to  avert  dunKcr 
of  crises,  87  ;  efTect  on  prices 
of  the,  221-222. 

D 

David,  EdKcworth,  cited  on 
I)n)iiiisi'  of  gold  in  the  Ant- 
arctic, 2(l!». 

Debts,  fallacy  eonccrniiiK  the 
lack  of  money  to  pay  all, 
1<J~17. 

Del  Mar,  Alexander,  History 
of  Precious  Metals  by,  cited, 
165. 

Denmark,  diagram  of  price 
curves  in,  169. 

Dejiosit  currency,  influences 
affecting  volume  of.  and 
therefore  affecting  prices, 
101-103.     See  Bank  deposits. 

Diaprams  showing  price  move- 
ments, 101-179. 

Division  of  laljour,  effect  of, 
on  price  level,  89. 

Dollar,  purchasing  power  of 
the,  is  the  reciprocal  of  the 
giiieral  level  of  prices,  23. 

E 

England,  diagrams  showing 
price  curves  in,  ItiO,  161. 

Equation  of  exchange,  defined 
as  a  statement,  in  mathe- 
matical form,  of  the  total 
transactions  effected  in  a 
certain  period  in  a  given 
community,  35 ;  obtained 
by  adding  together  the  equa- 
tions of  exchange  for  all 
individual  tran.sactions.  35 
30;  aritlinietical  illustration, 
35-41;  mechanical  ilUi.tra- 
tion,  41-44;  algel)raic  illus- 
tration, 44-40. 

Essars,  Pierre  des,  investiga- 
ti-'-n?  by,  of  velocity  of  vircu- 


lation  of  European  bank 
deposits,  100. 

Exchange,  of  different  kinds  of 
wealth,  4  ;  money  as  wealth 
which  is  gen"rally  acceptable 
as  a  medium  of,  4  ;  six  pos- 
sible types  of,  of  goods,  69. 

Exchangeability,  degrees  of,  29. 

Exchanges,  classification  of,  34. 

Extravagance,  as  a  reason  for 
high  cost  of  living,  198 ; 
an  efTect  of  the  high  cost  of 
living  rather  than  a  cause, 
199. 


Fallacies,  concerning  money, 
15  -23  ;  underlying  i)opular  ex- 
planations of  high  cost  of 
living,  189  IT. ;  important 
political,  social,  and  economic 
effects  of,  204-206. 

Farms  and  farming  and  tho 
high  cost  of  living,  200-201. 

Ferguson,  J.  F.,  cited,  156  n. 

Fiduciary  money,  defined,  31 ; 
examples  of,  31-32;  quality 
of,  making  for  exchange- 
ability, 33  ;  proportion  of,  in 
United  States,  33. 

Fisher,  Irving,  The  Nature  of 
Caintnl  and  Income  b>  ,  cited, 
2  ;  The  Purchasing  Power  of 
Mom  II  by,  155  n.,  1,58,  182; 
articles  by,  cited,  182,  184. 

Fleetwood,  Bishop,  statistics 
by.  quoted,  158. 

Foreign  trade,  influence  of,  on 
'luantity  of  money  and  hence 
on  price  level,   104-111. 

France,  working  of  system  of 
bimetallism  in,  128-130;  dia- 
gram of  price  curves  in, 
107. 

Frederick  the  Great,  mistake 
made  by,  concerning  circula- 
tion of  money  and  acquisition 
of  wraith,  19. 


227 


1^ 


INDEX 


I 


Freedom  of  trade,  otfcci  ni.  on 
volume  of  trade  and  on  prices, 
91. 

G 

Oeographical      differences      in 
natural    resources,    effect   of, 
on  price  level,  SO. 
Germany,     diagram     of     price 

curves  in,  106. 
Gold,    manner   of   coming   into 
use  as  money,  27  ;  discoveries 
of,    which    originated    price 
cycles,    82 ;     continuance    of 
inflation  ot,  shown  to  be  prob- 
able, 20S-210. 
Goods,    use   of   the    term,    14 ; 
classification    of.     as    actual 
money,  rights  to  draw  money 
(deposits),      and      all     other 
goods.  69 ;   six  possible  typos 
of  exchange  of.  6!). 
Government    bonds,    exchange- 
ability of,  29. 
Greenback  standard  in  United 

States,  135,  162. 
Gresham's  Law,  that  the 
cheaper  of  two  or  more  kinds 
of  money  tends  to  drive  out 
the  dearer.  121-124;  effect 
on  system  of  bimetallism. 
124-126. 


Herschell,  Lord  Farrer,  on 
hoarding  in  India,  211. 

High  cost  of  living,  fallacies 
underlying  popular  explana- 
tions of,  189  ff.  :  an  aid  to 
socialism,  204-205;  dissatis- 
faction and  unrest  a.iioiig 
wage  earners  and  salaried 
men  due  to.  205. 

History  of  price  levels  in  differ- 
ent countries,  l.'iO-lSS. 

Hoarding,  effect  of.  on  velocity 
nf  rirr-.d.-ition  and  "ii  prices, 
9.3-95  ;   extent  of,  in  Oriental 

2 


countries,  210-212;  lessening 
tendency  toward,  and  effect 
on  price  nidvements,  212-215. 

Holland,  diagram  of  price 
curves  in,  168. 

Holt,  Byron  W..  quoted  on 
rising  prices  and  discontent, 
205. 

Human  wants,  price  level  af- 
fected by,  90. 

I 

Importation     and    exportation 

of  money,  effect  of,  on  prices, 

104-111. 

Income,  viewed  as  satisfactions, 

11;        distinction       between 

money  income  and  real,  11- 

12  ;    cost  of  living  dependent 

upon   amount   of  money   in- 

(ome  it   costs   to  secure  real 

income,  12. 

Index  numbers  of  prices.   148- 

155  ;     history   of   price   levels 

as    shown    by    ancient    and 

modern,  156  ff. 

India,     price     movements     in, 

174-179;    diagram.   179. 
Individual,  effects  of  habits  of 
the,    on    velocity   of    circula- 
tion and  so  on  prices,  93-97. 
Individual     prices,     sympathy 
between,    and    general    level 
of  prices,  23-25. 
Inflation     of     money     and     of 
credit  currency,  as  a  cause  of 
upward  price  movement,  182- 
ls5. 
i  Insolvency,    condition    of,    64 ; 
I      safeguard    against,    in   bank- 
ing, fcunid  in  large  capital  and 
siirphis.  ()5. 
I  Insiitficiciic-y   of   cash   in   bank- 
ing. 64  ;    a  large  cash  reserve 
i      a  safeguard  against,  65. 
Interest,  the  rate  of,  and  condi- 
tions     determining,      21-22. 
Srv  Rate  of  interest. 

28 


INDEX 


trade,    ntjulativc 
on    price    levels, 


International 

effects    of, 

104-111. 
Italy,  diagram  of  price  curves 

in,  170. 


Japan,  price  movement.^  in, 
174-179;    diiiKnmi,   17S. 

Jevons,  quoted  on  paper  money, 
133;   cited,  160- 170. 

K 

Klondike,  price  cycle  starting 
with  di.scover.v  of  jjold  in,  S2. 

Kniljl)s,  (.',.  H.,  culculation.s  of, 
159.  KiO.  llil. 

Knowledne  (if  fechniiiue  of 
production,  price  level  af- 
fected i)y,  89. 


Labour,    viewed   as  a   cost   of 

wealth,  10-11. 
Labour  unions,  not  to  be  held 

wholly    responsible    for    high 

cost  of  living,   193-194. 
Land,  relation  betwi-en  cost  of, 

and  cost  of  living,   201-201'. 
Legal-tender  money,  JO. 
Limit  of  tolerance  of  the  mint, 

124. 
"Limping"  standard,  monetary 

system  called,  130-13.">. 
Loans,  effect  of.  on  velocity  of 

circulation  and  on  prices,  90- 

97. 

M 

Mail  and  express,  effect  of,  on 

velocity    of    circulation    and 

on  prices,  100. 
Making  money,  .i  cateh  j.hrase, 

22-23. 
Measurement,      of     wealth     in 

value    and     in    <iuantity,     '> ; 

!;f  ff.-.t-i  >:{  %vi:|Ith      !i! 


Mechanical  illustration  of  equa« 
tion  of  exchange,  41-44. 

Melting  and  minting,  influence 
of,  (in  ((uantity  of  money  and 
therefore  on  prices,  111-114. 

Mercantilism,  set  of  doctrines 
called,  19-20. 

Middleman's  profits  as  an  cx- 
Iil.iiiation  of  high  cost  of 
living,  194. 

Milling  (if  coins,  to  prevent 
debasement,  124. 

Mining,  edect  on  price  move- 
ments of.  114-117,  158. 

Mitchell,  Wesley  C,  mono- 
grapii  on  "Bu.sineas  Cycles" 
by,  M. 

Monetary  systems.  efTect  of 
character  (jf,  on  volume  of 
trade  and  on  i)rices,  92 ; 
discussion  of  operation  of, 
121  ff. :  principle  enunciated 
in  (Ire-sham's  Law,  121-124; 
bimetallism,  124  130;  the 
"limping"  standard,  130-134 ; 
vffoct  on  price  movements, 
shown  by  India  and  Japan, 
170   179. 

Money,  i)rimarily  means  wealth 
which  is  generally  acceptable 
in  exchange,  4  ;  use  of,  not 
only  as  u  medium  of  exchange, 
but  also  as  a  measure  of 
value,  6 ;  mistakes  to  be 
avoided  in  use  of,  f(jr  measur- 
ing wealth,  0~«;  use  of,  for 
measuring  the  benefits  and 
the  costs  of  wealth,  9-10; 
fallacies  concerning.  15  ff.  ; 
confusion  of  wealth  and,  15- 
10;  the  idea  that  if  one  man 
makes,  another  must  lo.se, 
l(i ;  fallacy  of  there  not  being 
enough  to  pay  all  debts,  10- 
17 :  the  notion  regarding 
insuflicienc.v  of,  to  do  the 
world's  business  and  the 
necessity  of  increasing  the 
quantity  of,   17- Ih,    the  mis- 


22«J 


m 


S-!i 


INDEX 


j  ': 

:t  % 

i 
1 1' 


I: 


Hi 


:    I. 


take  of  viowine,  as  an  indis- 
pensable   means    of    KottinK 
wealth.     Ih   lO;      promotinR 
the   circulation   of,    does   not 
promote  acquisition  of  wealth, 
19;    mistaken  ideas  ooncern- 
inn    wealth    and,    RiviiiK   rise 
to  Colbertism  or  Mercantil- 
ism,   19-20;     wronK   reason- 
ing   of    majority    of    protec- 
tionists       concerning,        20 ; 
fallacy    concerninK    the    rate 
of  interest,  21-22;    consider- 
ation   of    real    functions    of, 
25   ff. ;    extension   of   defini- 
tion   to    include    all    goods 
generally    acceptable    in    ex- 
change for  other  goods,  26; 
legal  tender,  20  ;  examples  of 
commodities  at  certain  places 
and   times   generally   accept- 
able   in    exchange  found    in 
gold  dust,  tobacco,  and  wam- 
pum,    20-27;      method     by 
which    certain     commodities 
came  into  use  as,  27 ;    coin- 
ing  is   merely    the    finishing 
touch    placed    on.    27 ;     the 
most   exchangeal)lo   of    com- 
modities, 29  ;   why  checks  are 
not,  but  bank-notes  are,  .30  ; 
primary  and  fiduciary',  ',i()-'i'i  ; 
what  is  meant  by  money  in 
circulation,      31 ;      ratio     of 


7-2: 


re- 


bank  deposits  to 
mote  causes  which  influence 
circulation  of,  and  so  affect 
prices,  93-101  ;  influences 
affecting  quantity  of,  and 
therefore  affecting  prices, 
104-120  ;  increase  of,  shown 
not  to  decrease  its  velocity, 
141-147;  continued  increasi- 
likely  in  world  supply  of, 
208-215. 
Money  metals,  influence  of  pro- 
duction and  consumption  of. 
on  uuuutity  of  money  and  so 
on  prices,  114-119. 


Monopolies,  ofTeet  of,  on  prices, 
92,  102,  192-193. 

Mortgages,  exchangeability  of, 
29. 

Murray,  Nathaniel  C,  agri- 
cultural statistics  by,  200. 

N 

New  oouth  Wales,  price  move- 
ments in,  177. 

Newspapers,  effect  of,  on  volume 
of  trade  and  on  prices,  91. 

New  Zealand,  diagram  of  price 
curves  in,  176. 

O 

Orientals,  hoarding  of  money 
by,  210-212  ;  lessening  ten- 
dency of,  toward  hoarding, 
212-215. 

Outgo,  viewed  as  efforts  to 
secure  satisfactions,  11. 

Ownership,  complete  and  par- 
tial, 12-13;  partnership  rights 
vs.  shares  of  stock,  12-13. 


Paish,  Sir  George,  English 
agricultural  statistics  by,  200- 
201. 

Paper  money,  mistake  of  sup- 
posing wealth  to  be  created 
by,  19;  an  example  of  fidu- 
ciary money,  32. 

Partnership  rights,  12-13. 

Pa>Tnents,  effect  of  systems  of, 
on  velocity  of  circulation 
and  on  prices,  97-99. 

Population,  effect  of  density  of, 
on  velocity  of  circulation  and 
on  prices,  100;  concentra- 
tion of.  ill  cities  as  a  reason 
for  high  cost  of  living,  200. 

Price  level,  three  sets  of  causes 
nffecting,  35;  effect  on,  of 
dotihling  denominations  of 
nioiiev.   of  reissuing  and   re- 


230 


INDEX 


coininf;,  of  doiihling  quantity 
of  mouey,  and  of  a  soignior- 
agc  rhargc,  40 -40. 

Price  lovcls,  history  of,  150  ff. 

Price  of  money,  use  of  the 
phrase,  21-22. 

Price  of  wealth,  defined,  5. 

Prices,  the  purcha.sint;  power  of 
the  dollar  the  reciprocal  of 
the  general  level  of,  23 ; 
dependence  of  individual, 
upon  general  level  of,  24 ; 
period.s  of  rise  in,  7G-7S ; 
culmination  of  |)eriod  of  ris- 
ing, in  a  crisis,  7.S -SO ; 
period  of  falling,  after  crises, 
80~H1  ;  remote  influences 
which  affect  trade  atid  there- 
fore prices,  SK  fT. ;  effect 
of  geographical  differences, 
division  of  lalxjur,  knowledge 
of  technicjuc  of  production, 
and  the  accumulation  of 
eapital,  89-90;  effect  of 
extent  and  variety  of  human 
wants,  90 ;  effect  of  facilities 
for  transportation,  91 ;  effect 
of  relative  freedom  of  trade, 
91 ;  effect  of  character  of 
monetary  and  !)anking  sys- 
tems, 92  ;  effect  of  business 
confidence,  92  ;  remote  influ- 
ences affecting  velocities  of 
circulation  and  therefore 
prices,  9.3  ff. ;  effect  of 
hoarding,  93-95 ;  eff(>ct  of 
book  credit  and  loans,  95-97  ; 
effect  of  use  of  checks,  97 ; 
effect  of  systems  of  payments 
in  communities,  97-99 ; 
effect  of  density  of  popula- 
tion, 100;  effect  of  rapidity 
of  transportation,  100  ;  influ- 
ences affecting  volume  of 
deposit  currency  and  there- 
fore prices,  101-103;  influ- 
ence of  the  "hahuiie  of 
trade"  f>n  (junr-.tity  nf  nK'.it'v 
and  therefore  on  prices,  101 


109 ;  effect  of  protective 
tariff  on,  109-110;  influenco 
of  melting  and  minting,  111- 
1 14 ;  effect  of  influence  of 
production  and  consumption 
f)f  money  metals,  114-119; 
influenco  of  monetary  and 
banking  systems  on,  121  ff. ; 
computing  index  luimbers  of, 
148-155 ;  comparison  of 
levels  of,  in  different  periods 
and  countries,  156  ff. ;  dis- 
cussion of  present  U[)ward 
movement  of,  180-185; 
movement  of,  in  United 
States,  compared  with  that 
of  wages,  180-188;  popular 
explanations  of  upward  move- 
ment of,  and  fallacies  under- 
lying, 189-203;  discontent 
and  unrest  due  to  high,  204- 
205 ;  outlook  as  to  future  of, 
207-219  ;  conclusions  as  to  fu- 
ture movements  of,  219-223. 

Primary  money,  defined,  30- 
31 ;  ((ualities  of,  making  for 
exchangeability,  33 ;  propor- 
tion of,  in  United  States,  33. 

Production,  cost  of,  given  as 
a  reason  for  high  cost  of 
living,  195-197. 

Proiierty  rights,  distinction  be- 
tween wealth  and,  4,  13 ; 
distinction  between,  and  the 
certificates  of  those  rights,  14. 

Protection,  Colbert  an  early 
advocate  of  policy  of,  20; 
fallacious  reasoning  of  major- 
ity of  protectionists  concern- 
ing, 20. 

Protective  tariff,  effect  of,  on 
price  levels,  109-110. 

Purchase  and  sale,  the  exchange 
of  money  against  goods,  4, 34. 

Q 

Quantity  theory  of  money,  that 
the  price  h^vel  varies  directly 


231 


INDEX 


I 


J 


m 


i  j 


as  thp  quantity  of  monoy  in 
pirrulation.  .35.   4(> ;    illustra- 
tion and  oluridation  of,   46-  ' 
51.  j 

Quantity  of  monoy,  fallacy  j 
roncrrnins  the  iifccssity  of 
iucrcasinK.  to  do  thi-  world's 
husines!*,  17-lS;  relation  l>i'- 
twppn  price  level  ;iti<l,  .3.5  fT.  ; 
moans  the  number  of  dollars, 
or  other  monetary  unit.s,  in 
rirculation,  4() ;  effect  on  priie 
level  of  diange.s  in,  by  four 
different  methods,  40-4!* ; 
relation  between  ((uantity  of 
ciroulatinK  credit  and,  71- 
74;  influence  of  "l)alancc  of 
trade"  on,  and  therefore  on 
prices,  104-111;  influence  of 
melting  and  mintiiiR  on,  and 
on  prices,  111-114;  influ- 
ence of  production  and  <'on- 
sumption  of  money  metals 
on,  and  on  prices,  114-110; 
influence  of  monetary  and 
hanking  systems  on,  and  on 
prices,  121  ff. ;  increase  in, 
shown  not  to  decrease  its 
velocity,  141-147;  forecast  of 
future  increase  in,  20!S-215. 

R 

Railways,  effect  of,  on  volume 
of  trade  and  on  prices,  itl  ; 
effect  of,  on  velocity  of  cir- 
culation and  on  i)rices,    100. 

Rapidity  o'  transportation, 
effect  of,  '.  I  velocity  of  cir- 
culation and  so  on  prices,  100. 

Rate  of  interest,  a  common 
money  fallacy  concerning  the, 
21-22;  lowering  and  raising 
by  a  l)ank,  to  maintain  its 
cash  reserve  in  right  propor- 
tions, 07;  as  a  safeguard 
against  crises,  S3-K0. 

Real  eslate,  one  of  (]ie  h'u.^t 
exchangeable  of  gooiis.  20. 


Rising  prices,  per'.)ds  of,  76-78. 
Rome,  cost  of  living  in  ancient, 
156  n. 

S 

.'<ca-water  gold,  210. 

Seigniorage  charge,  effect  of, 
on  price  level,  40,  113. 

.Sheavyn,  Phfvbo,  work  by, 
•  luoted,    1.57- l.W,  203. 

."silver  money,  an  example  of 
fiduciary  money,  31  ;  applica- 
tion of  (Iresham's  Law  to, 
121-124;  under  a  .system  of 
bimetallism,  124-1,30. 

Socialism,  high  cost  of  living  a 
force  working  for,  204-205. 

South  America,  effect  on  trade 
and  on  prices  of  lack  of 
business  confidence  illus- 
trated by,  02. 

Spain,  diagram  of  price  curves 
in,  172. 

Steamships,  effect  of,  on  volume 
of  trade  and  on  prices,  01. 

Stockholflers  in  banks,  03. 

Supply  and  demand,  mistake  in 
explaining  high  cost  of  liv- 
ing by,  100-101. 

Systems  of  payments,  effect  of, 
on  velocity  of  circulation  and 
on  prices,  97-90. 


Tariff,  false  reasoning  about  a 
protective,  20 ;  effect  of,  on 
volume  of  trade  and  on  prices, 
01  ;  effect  of,  on  price  levels, 
100-  1 10  ;  mistake  made  in 
assigning,  as  a  popular  expla- 
nation of  high  cost  of  living, 
102;  effect  of  lowering  of,  in 
liiited  States,  221. 

Telegraph  and  telephone,  effect 
(if,  on  volume  of  trade  and  on 
prices,  01  ;  effect  of,  on 
Velocity  of  circuhitiou  and 
on  prices,  100. 


232 


'-^!*jwi-.^; 


INDEX 


Th6r>-,  Edniond,  artido  by, 
1H4-1H5. 

Tobaooo  used  as  money  in  early 
VirKinia,  27. 

Transportation,  effect  of  faeili- 
ties  for,  on  volume  of  trade 
and  on  prices,  91  ;  effect  of 
rapidity  of,  on  velocity  of 
circulation  and  on  prices,  KK). 

Tnists,  effect  of,  on  prices,  !»2 ; 
effect  of,  on  volume  of  de- 
posit currency  and  conse- 
quent raisiiiK  of  prices  hy, 
102;  raising  of  particular 
prices  by,  does  not  affect 
Kcneral  price  level,  10.3 ; 
mistake  Renerjilly  made  in 
Riving  as  a  reason  for  high 
cost  of  living,  192-193. 

U 

United  States,  system  of  bimet- 
allism and  the  present  "limp- 
ing" .standard  in,  124-135; 
diagram  showing  price  curves 
in,  103  ;  movement  of  whole- 
sale and  retail  prices  and  of 
wages  in,  187  ;  effect  of  lower- 
ing of  tariff  in,  and  of  new 
currency  act,  221-222. 


Value  of  wealth,  finding  the, 
5  ;  use  of  money  as  a  measure 
of ,  6 ;  care  to  be  used  in 
expressing  the,  6-S. 

Variety  of  human  wants,  rela- 
tion between  volume  of  trade 
and  price  level  and,  90. 

Velocity  of  circulation,  relation 
between  price  level  and,  35  ff.  ; 
influences  affecting,  and 
therefore  affecting  prices,  93 
101  ;  effect  on.  of  (jiscontin- 
uance  of  hoarding,   214-215. 

Volume  of  trade,  relation  be- 
tween price  level  and,  35  ff.  ; 
remote    influences    affecting, 

23 


and  therefore  affecting  price 
level,  88-92;  is  not  increasing 
in  proportion  to  other  factors 
in  equation  of  exchange,  218- 
219. 

W 

Wage  earners,  dissatisfaction 
and  unrest  among,  owing  to 
high  cost  of  living,  205. 

Wages,  movement  of,  in  United 
States,  compared  with  move- 
ment of  prices,   186-188. 

Wampum,  used  as  a  medium  of 
exchange  among  Indians,  27. 

Wars  as  a  reason  for  high  cost 
of  living,  197-198. 

Wealth,  defined,  2  -3  ;  mea.sure- 
ment  of  each  kind  of,  in  its 
own  physical  units,  3  ;  to  bo 
distinguished  from  the  quali- 
ties of  wealth,  the  use  or 
benefits  of  wealth,  and  the 
written  certificates  of  prop- 
erty rights,  4 ;  exchange  of 
different  kinds  of,  and  u.se  of 
money  as  a  medium  of  ex- 
change, 4  ;  price  of,  defined, 
5;  value  of,  tiefined,  5;  ad- 
vantage of  measurement  of,  in 
value  rather  than  in  quantity, 
5  ;  use  of  money  as  a  measure 
of  value  of,  6  ;  care  to  be  used 
and  fallacies  to  be  avoided  in 
use  of  money  for  measure- 
ing,  0-8 ;  ownership  of,  is 
the  rights  to  its  benefits,  8; 
benefits  of,  defined,  8-9; 
co.sts  of,  defined  as  negative 
Ix'iiefits.  10 ;  division  of 
ownership  of,  12-13;  dis- 
tinction l)etween  i)roperty 
rights  and,  13 ;  mistake  of 
confusing  money  with,  15- 
10  ;  fallacy  of  viewing  money 
as  an  indispensable  means  of 
getting.  18-19;  acquisition 
of,  not  promoted  by  promot- 
ing circulation  of  money,  19. 

5 


■A'i 


i 


*HE    following    pages   contain    advertisements    of 
Macmillan  books  h>   the  same  author. 


5  ,*.-w-J^r^;?- 


Irving  Fisher's  New  Work 

Standardizing  the  Dollar 

Hy  IRVINd   FISHKR 

Author  of  "The  Purchasing  Power  of  Money,"  "  Nature  of  Capital 

and  Income."  etc. 

Cloth,  1 2 mo 

Herein  will  be  found  a  complete  statement  of  the 
plan  suggested  by  Professor  P'ishcr  for  combating  the 
rise  in  the  cost  of  living  by  "  standardizing  "  or  stabiliz- 
ing monetary  units.  The  author  shows  how  such  a 
standardization  is  a  remedy  for  the  financial  crises  from 
which  society  periodically  suffers.  The  scheme  pro- 
poses to  set  up  a  unit  which  shall  be  invariable  in  the 
same  sense  that  our  units  of  length  and  weight  are  in- 
variable. It  does  this  by  "  compensating "  for  every 
fall  in  the  purchasmg  power  of  gold  virtually  by  adding 
to  the  weiglit  of  geld  in  the  dollar ;  in  other  words,  it 
would  get  rid  of  the  present  fixed  price  of  gold  and  allow 
new  supplies  of  gold  to  lower  the  price  of  gold  instead 
of,  as  at  preseii'.,  raising  the  price  of  goods. 


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By  IRVING  FISHER 

The  Purchasing  Power  of  Money 

New  and  Revised  Edition,  Cloth,  8vo,  $2.25  net 


.,-f 


What  the  Leading  Reviewers  Say  of  "  The  Purchasing  Power 

of  Money  " 

"The  Dred-ction  mav  be  ventured  that  the  book  will  become  a  clas- 
sic ilthe'Se-r^ai^ure  of  money,  and  that  it  .ill  also  prove  a  st^rt,n|- 
point  for  fruitful  investigation  in  the  future.  -  O.  M.  W.  Spraoue, 
Harvard.     The  Quarterly  Journal  oj  Economics. 

..  .  .  and  may  fairly  be  called,  on  the  whole,  the  "^o^*  m'Cvm 
American  book  of  the  year  in  the  field  of  economics.  -  David 
k'lTv  University  of  Illinois.  Journal  of  the  American  Economic 
Association. 

..  As  very  little  of  an  authoritative  nature  has  been  ^vritten  in  this 
country  on  this  question,  outside  the  covers  o  form  dable  Blue 
Books  Professor  Fisher's  book  should  be  w.dely  read  espec ul  y 
fince^hc  general  level  of  prices  seems  to  be  rismg  and  the  pubhc  is 
once  tm,re\ecoming  concerned  in  the  conditions  which  determir.e  the 
purchasing  power  of  moaey."-  T/:.  Economist,  London.  England. 
..  It  is  one  of  the  most  important  books  of  the  year  on  economic 

''!.7o  the  economist,  to  the  general  reader,  most  of  all,  perhaps.  to 
the  lecturer  and  the  student,  we  can  recommend  the  book  ^er> 
warmly."  —  Westminster  Gazette,  London.  England. 

-To  investors  and  business  men  generally,  its  chapters  will  be 
found  t"cont.un  matter  of  very  direct  and  practical  bearing.  - 
Canadian  Finance. 

..  His  suggestion  of  a  new  and  more  stable  standard  of  value  is  so 
impornnt,  though  he  says  that  years  of  education  of  the  public  must 
pSe  anv  attempt  to  put  it  into  practice,  that  we  have  obt.ained 
permission -of  the  Macmillan  Comp..ny.  publishers  of  the  book,  to 
present  here  an  abstract  of  the  professor-s  proposal. 
^-  Probably  no  modern  writer  has  studied  this  question  inore  deeply 
than  Professor  Fisher,  and  his  suggestion  of  a  new  standard  of  value 
deserves  the  careful  thought  of  every  banker,  investor,  and  business 
m2Sir  —  Moodfs  Mai^azine. 


What  the  Leading  Reviewers  Say  of  "  The  Purchis.ng  Power 

of  Money  " 

"...  certainly  this  work  of  Professor  Fisher's  will  be  of  great  aid 
to  such  bankers,  merchants,  and  investors  as  are  now  studying  fun- 
damental conditions."  -  RociEK  W.  Bauson.  H'eekfy  naromctcr 
Letter  ami  Composite  Plot  Compiling  Offices  of  Babson's  Statistical 
Organization. 

"  It  is  the  vigorous  expression  of  a  keen  intellect ;  its  straightfor- 
wardness and  its  definite  purpose  mark  it  as  distinctly  unacademic. 

"  This  book  is  challenging,  informing,  and  guiding.  It  shows  tlie 
way  and  defines  the  issue."  —  Frank  Hendrick.  Trend,  New  York 
City. 

"  Professor  Fisher's  book  should  be  read  by  every  one  who  is  in- 
terested in  monetary  problems.  It  lays  upon  secure  found?Mons 
certain  essential  principles  which  can  never  hereafter  be  reasonably 
questioned.  It  is  a  very  valuable  contribution  to  the  new  political 
science,  whose  teachings  are  not  to  be  colored  through  social  or 
political  prejudice."  —  William  Howe  Crane.     The  Public. 

"The  volume  before  us  sheds  abundant  light  on  what  is  to  most 
every  one  a  mysterious  subject,"  —  Engineering  Literature. 

'•  Your  work  appears  to  me  a  most  extraordinary  one.  The  book 
is  absorbingly  interesting,  and  the  lucidity,  cogency,  and  accuracy 
of  its  reasoning  could  hardly  fail  to  carry  conviction  in  an  unusual 
degree."  —  John  Perri.n,  Chairman  of  the  Board,  The  Fletcher 
American  National  Bank  of  Indianapolis. 

"An  important  study  in  financial  economics  is  Professor  Irving 
Fisher's  '  The  Purchasing  Power  of  Money.' "  .  .  .  _  American, 
Philadelphia,  Pa. 

"...  there  is  much  of  value  and  illumination  in  this  well-rea- 
soned scientific  yet  readable  work."  —  Statesman,  Boise,  Idaho. 

'"The  Purchasing  Power  of  Money,'  by  Irving  Fisher.  Professor 
of  Political  Economy  at  Yale,  is  suggestive  of  a  threadbare  topic,  hut 
it  is  anything  but  that.  The  volume  of  500  pages  is  a  refreshin;,' 
study  and  reconstruction  of  the  *  quantity  theory,' "  —  Leader,  Clevt- 
lana,  O'lio. 

"  Few  persons  are  more  successful  than  Professor  Fisher  in  putting 
old  wine  into  new  bottles.  He  has  taken  the  most  hotly  debated  of 
all  economic  questions,  and,  by  the  use  of  arguments  long  familiar 
to  special  students,  h.Ts  produced  an  imposing  worV..""  —  JVation, 
New  'iOrk  City. 


» 


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;; 


V 

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: 

1 

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J 

i  •  ■ 

R 

OTHER  WORKSJY  IRVING  FISHER 

The  Rate  of  Interest 
Its  Nature.  Determination,  and  Relation  to  Economic  Phenomena 

Cloth,  Hvo,  44-'  pass's,  Index,  $3.0"  '"I 

houses,  for  instance)  more  n^'"  ""«•    J    '"^'Tete!  hut  the  m>.st  valuable 

The  Nature  of  Capital  and  Income 

"  A  great  b.iok.  an.l  anaUtKai,  '"i-'^^  '  *       '  ^^'^^  ^s  well  as  dear,  and 
tne  reasonii  „  .  ..  u,«eirna  del  Mi>v  mcnto  iicienti- 

of  Capital  and  In.onK-,'  wh.ch  ^^^^^^^J^^      "is    he  gap  between  bis 
length.  .  .  .    r  •aulbor>sanecom mustwhul^r  1^  K^ 

;-::SlS;:^:=- ;-^  ■;  t;:e^^;:^..eratur^'of  ..r  se.enee. 

A  Brief  Introduction  to  the  Infinitesimal  Calculus 

Rr,hr,l  Kdition.    Clolh,  iJmo,  S4  p<ij;<".  $-7.^  "•• 

Journal  of  EdiicaHon:  „.  .  .;,ilv  lo  nid  in  rea.ling  .nathen.at- 

..This  lit.U-  volun,e  .s  d..s,gno    ^^ ^^^^  „  ,,Ase  .^  th.se 

'        ■    ;i  matter  ut   general  eduea- 


as 


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llo  w  1 

tion. 


Elementary  Principles  of  Economics 


Teachers  who  have  teste 
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,a  the  book  in  classrooms  have  become  enthusi- 


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